- Retail sales dropped more than expected with consumers spending more on gas and groceries and less on cars.
- Rising mortgage rates caused housing starts to fall.
- The job market remains strong with unemployment at a 50-year low.
Retail sales in May declined more than expected, and inflation pressures led to continued shifts in the pattern of spending. Adjusted for inflation, retail sales were down compared with a year ago, but spending remains quite robust on a nominal basis. Consumers are spending more on gas and groceries but less on cars, electronics, appliances and furniture.
Rapidly rising mortgage rates are taking a toll on housing and new construction. Housing starts fell 14% in May.
The job market continues to be strong as jobless claims are stable and continuing claims remain at 50-year lows.
Retail sales fall: Retail sales declined more than expected in May, and inflation pressures led to continued shifts in the pattern of spending. The initial estimate showed a total monthly declined of 0.3% when a decline of 0.1% was expected. This followed a weaker than expected and downwardly revised gain of 0.7% in April.
Declines in spending at auto dealers drove the headline decline, as sales excluding motor vehicles and parts increased 0.5% while sales of motor vehicles and parts declined 3.5%.
It was another mixed month for retailers. Motor vehicle and parts stores (-3.5%), electronics and appliance stores (- 1.3%), furniture and home furnishing stores (-1.1%), miscellaneous stores (-1.1%), and non-store (ecommerce) retailers (-1.0%) were the largest decliners. Gas stations (+4.0%), grocery stores (+1.2%), and department stores (+0.9%) were the largest gainers.
Retail sales were up 8.1% year-over-year on a nominal basis. Compared to last year, several categories were down including motor vehicles and parts (-3.7%), electronics and appliances (-4.5%) and sporting goods, hobby, book, and toy stores (-0.2%). The biggest year-to-year gainers were gas stations (+43%), miscellaneous stores (+26%), and food services and drinking places (+17%). Retail sales are measured in dollars, so higher inflation plays a role in the increases being measured. Adjusted for inflation using the Consumer Price Index, retail sales in May declined 1.2% from April and were down 0.4% from a year ago.
Housing starts drop: Residential construction pulled back substantially in May as the substantial movement up in mortgage rates is likely causing a big drop in new home sales and/or an increase in cancellations, which causes builders to need to pull back on the planned construction of homes.
The seasonally adjusted annualized rate of starts declined 14.4%, when a decline of only 1.8% had been expected. Permits declined 7.0% when a smaller decline of 2.5% had been expected. The starts decline was amplified by a 23.7% decline in the more volatile multifamily component, but even the decline of 9.2% in single family starts was much worse than expected.
After the May decline, starts were down 3.5% year over year but still up 18.4% compared to May 2019. Permits were up 0.2% from a year ago and up 25.6% compared to 2019. Permits lead starts, so the permitting pace at 1.695 million units was higher than the 1.549 million starts pace, which is usually an indication that starts should continue to increase in future months. However, if we see a similar decline in new home sales, which are reported this week, we could see starts fail to materialize on already permitted homes in future months.
In permits, single family declined 5.5% in May while multi-family declined 9.4%. Compared to 2019, single family permits were up 25%, while multi-family permits were up 27%. With the cost of housing jumping, the country needs more construction, not less. In the near term it looks like residential construction could quickly become a drag on economic growth if the recent trends continue. To make matters worse down the road for the economy, vehicle sales tend to follow the trend in home sales and in new construction.
Joblessness low: Seasonally adjusted initial jobless claims declined by 3,000 to 229,000 for the week ending June 11. Non-seasonally adjusted claims increased by 18,000, so the seasonal adjustment continues to create some noise in the headlines.
Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation, increased by 3,000 from the previous week and remain at 1.31 million as of the week ending June 4. That level of continuing claims was 451,000 lower than they were prior to the pandemic.
The broadest measure of continuing claims declined by 1,000 to 1.28 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is down 89,000 over the last four weeks and is 821,000 lower than the pre-pandemic level. The job market continues to be incredibly strong.
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Jonathan Smoke is chief economist at Cox Automotive.