The U.S. may still avoid a recession, retail sales indicate

Retail sales, including restaurant spending, increased two tenths of a percent month-over-month in June. But the question for several years now has been and continues to be: are we actually buying more stuff? Or buying less and just paying more for it? 

Spending has grown the past couple years, which on the face of it is good for the economy.

“Part of that was reflecting higher prices, not necessarily the fact that consumers are buying more product,” said Lydia Boussour, a senior economist at EY Parthenon.

“Retail sales, what consumers have really been buying, the volume of sales has been quite flat and is actually down on a year over year basis,” said Boussour.

Inflation and spending are kind of in this nasty race. You spend more, good for the economy, but you are actually getting the same amount of stuff or less, which at some point is not so good.

“So right now the race is pretty neck and neck,” said Sofia Baig, an economist at business intelligence firm Morning Consult. But there is a caveat to all this. What we have today are retail sales numbers. Retail sales is just retail sales. It doesn’t include things like airfare or services. If you add those in, which Morning Consult did, you find the economy’s been on quite a journey this year.

“What we’ve seen in our data is consumer spending was very strong in January, February, and in March and April it took a decline,” said Baig.

A lot of that was higher income consumers, Baig says, who were affected more by tech layoffs and fear during that whole banking sector crisis. Now, she says, those folks are spending more on vacations, baseball games, entertainment.

“And so I’m not as surprised to see retail sales tucker out a little bit. Because it seems there’s a little bit of a substitution effect where people are prioritizing spending on experiences this summer more than they are spending on goods,” Baig said.

What this all means is that yes, we are still dealing with inflation, But as that inflation comes down, the consumer is — for now — holding on. Paul Ashworth is chief U.S. economist at Capital Economics.

“In broad terms it is consistent with the idea that the economy will avoid a recession, so achieve a soft landing,” said Ashworth.

Meaning we may not be spending like crazy, but things are generally OK. So as inflation goes down, the economy isn’t necessarily going down with it.