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  • Writer's pictureRealFacts Editorial Team

Retail Sales Miss Expectations While the Industrial Sector Moves Towards a More Balanced Equilibrium

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As the economic landscape evolves, the latest data reveals a complex picture of retail sales and industrial sector trends. In May, retail sales fell short of expectations, offering both caution and opportunity for investors and stakeholders. Concurrently, the industrial sector is moving towards a more balanced equilibrium, signaling a shift in market dynamics.

Tepid Growth in Retail Sales

May’s retail sales report indicated a modest increase of 0.1% month-over-month, missing the consensus estimate of 0.3%. Moreover, April's previously flat change was revised downward to -0.2%, adding to the subdued performance. The revisions and lower-than-expected growth underscore the impact of higher interest rates on consumer spending.

However, a deeper dive into the data reveals nuanced trends. Excluding gasoline stations, retail sales grew by 0.3% MoM, highlighting the influence of falling gasoline prices, which dropped by -2.2% during the month. This decline at gasoline stations masked more robust growth in other areas. Over the first five months of 2024, total retail and food services sales rose by 3.3% compared to the same period in 2023, driven by significant gains in nonstore retailers, which saw a 9.1% increase.

The Rise of E-Commerce

E-commerce continues to be a dominant force in the retail sector. As of Q1 2024, e-commerce accounted for 15.9% of retail sales, excluding food services and drinking places. Nonstore retail sales, which encompass electronic shopping, mail order houses, and direct selling establishments, have maintained positive momentum, growing at a compound annual growth rate (CAGR) of 11.8% over the last decade. More than 80% of nonstore retail sales now stem from e-commerce, underscoring its critical role in the retail landscape.

Industrial Sector Adjustments

The industrial sector, particularly warehouse and distribution (W&D) properties, has benefited from the e-commerce boom. Yet, fundamentals for this sector are expected to soften as higher borrowing costs shift consumer spending from goods to services. This trend is particularly evident in the moderation of demand for industrial real estate space. Forecasted completions for W&D properties in 2024 are nearly 200 million square feet, slightly exceeding net absorption and keeping the vacancy rate in the high-5% range. This movement towards a balanced equilibrium reflects both a cooling market and strategic adjustments in response to changing consumer behavior.

Consumer Spending Shifts

The retail sales report also highlighted areas of decline, particularly in big-ticket and discretionary purchases. Furniture and home furnishings stores experienced a -7.9% drop in sales, driven by higher interest rates making credit purchases more expensive. Additionally, discretionary spending on sporting goods, hobbies, musical instruments, and books declined by -2.5%. With the personal savings rate near its lowest level since 2008, consumers are increasingly cautious about non-essential expenditures.

Economic Outlook and Market Reactions

Despite the softer retail sales report, the market's reaction suggests a glimmer of optimism. The Federal Reserve's odds for a September rate cut increased, and the 10-year U.S. Treasury yield declined, signaling potential relief ahead. Moreover, the 30-year fixed mortgage rate dipped below 7%, providing a bit of respite for the housing market. Initial jobless claims also showed improvement, backing off last week's nine-month high.

Looking ahead, the upcoming Personal Income and Outlays report for May 2024 will provide a more comprehensive view of consumer spending and inflation trends. The core PCE Price Index, the Fed's preferred inflation gauge, will be closely watched, especially as retail sales data feeds into it. Positive inflation reports could further influence the Fed's monetary policy decisions, potentially easing the economic pressures on consumers and businesses alike.


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