Recent data reveals a decrease in sales for both grocery stores and department stores, indicating a potential shift in consumer spending patterns. Particularly, sales at service stations have experienced a 1.4% drop attributed to the impact of lower gasoline prices.

On the other hand, there was a slight 0.1% increase in sales at food services and drinking places following a significant 1.2% rise in May. Economists consider dining out to be a crucial indicator of household finances. Despite the decline in spending at restaurants and bars, credit and debit card data suggest that consumers are channeling their expenditures towards other services.

Notably, services hold the largest share in consumer spending, which underscores their importance in the overall economic landscape.

Bill Adams, the chief economist at Comerica Bank in Dallas, points out that the reduced spending on gasoline reflects cost-of-living pressures, indicating that lower- and middle-income households are finding ways to economize on discretionary expenses.

However, there seems to be a contrasting trend among wealthier households, as evident from the bustling crowds at airports and the surging prices for concert tickets this summer, suggesting robust spending in other areas.

As a result of these developments, stocks on Wall Street were observed to be trading higher, and the dollar maintained its stability against a basket of currencies. Additionally, U.S. Treasury yields experienced a decline.

Excluding automobiles, gasoline, building materials, and food services, retail sales experienced a notable 0.6% increase in June. Moreover, data for May underwent a slight upward revision, revealing that these essential retail sales, known as “core retail sales,” rose by 0.3%, surpassing the previously reported 0.2%.

Core retail sales play a crucial role as they closely align with the consumer spending component of the gross domestic product (GDP). With June’s substantial growth and the upward revision of May’s figures, it indicates that consumer spending, constituting over two-thirds of the U.S. economy, continued to expand during the last quarter.

However, it is worth noting that the growth rate in the last quarter is expected to be slower than the rate witnessed in the first quarter, which marked the fastest pace in nearly two years.

Bank of America Securities economists have revised their second-quarter GDP estimate, raising it from a 1.5% pace to a 1.7% annualized rate. Notably, in the January-March quarter, the economy grew at a 2.0% rate.

David Russell, the vice president of Market Intelligence at TradeStation, commented on the current state of the economy, stating that it is progressing steadily without showing signs of overheating. This development is seen as moderately positive news for investors, as concerns about the need for the Federal Reserve to raise interest rates after July have eased.

While consumers appear to be holding up well, manufacturers are facing challenges due to higher rates. According to a separate report from the Federal Reserve, manufacturing output declined by 0.3% in June, following a 0.2% drop in May. However, the weakness in manufacturing is primarily limited to goods production, while industries linked to services, such as travel, continue to expand.

Andrew Hollenhorst, chief economist at Citigroup in New York, expects this trend to persist in the upcoming months, although recent economic resilience has led to their prediction of a recession being pushed to the first half of 2024. This outlook could provide some support to manufacturing production in the near term.

Source: / Lucia Mutikani