Kelly Evans: What’s Wrong With the Retail Sales Report

Let's think back to July for a moment. I remember it well--the Fourth was my son's birthday. Covid was receding, summer was in full swing, and so we excitedly sent out invitations for a backyard birthday party. "Ohhhh...we'll be at the Cape! Sorry!" Read one reply. "Out of town--hate to miss it!" Read another. And another. And another.

We still had a great time, but it was clear that people were thrilled to be getting out of the neighborhood and back to much-loved summer travel spots again. And now, this has all become a major macro debate. Was the big miss in July retail sales Tuesday--they dropped more than 1% from June--all because people were too busy going places and not buying things instead?

I'm not buying it. Despite its name, "retail sales" captures a lot more than just buying things at the mall (check out page 5 here). It captures gasoline sales, up 2.4% last month from June (hello, vacation road trips). It captures bars and restaurants--or what they call "food services and drinking places"--which is half the point of going places (and they were also up 1.7%). Oh, but you shop for groceries at your beach house instead? No worries, grocery sales, which dipped last month, are included, too.

Even Amazon is in the report, under "nonstore retailers." That showed a big 3% drop last month, which some speculate is because Prime Day this year was shifted into June. The other big decliners last month were car sales, down 4%; clothing, down 2.6%; and furniture, building supplies, and sporting goods.

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"The details...suggest a more significant Q3 drag from the moderation in disposable income and the arrival of the Delta variant," Goldman Sachs economists wrote in response. Morgan Stanley marked down their consumer spending estimate by half a point to 3.1% for the quarter.

And now we have more evidence that the slowdown in consumer spending is real, and that in fact it is happening in the very places that should benefit most from people being back on the road or in the skies. "We calculate that weakening in leisure services spending is responsible for more than a quarter of the slowdown in total card spending over the last four weeks," wrote Bank of America economist Michelle Meyer this morning.

Spending on BofA cards has basically slowed from 18% growth in June (compared to the same month in 2019) to just 11% as of last week. And leisure spending in particular--which includes airlines, lodging, entertainment, and restaurants/bars--has slowed from a 2.5% growth rate over 2019 in late June to almost zero (0.6%) as of last week.