Even with the pandemic, consumers likely boosted retail sales in July

Published Thu, Aug 13 20204:14 PM EDTUpdated Thu, Aug 13 20204:59 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Key Points

Retail sales data is a key litmus test, and economists expect Friday's report will show consumers continued to spend in July, though at a slower pace than June.
Economists expect to see retail sales rise by 2.3%, helped by car sales, appliances and home improvement spending.
The report follows a series of better than expected data, from July's employment report to consumer inflation and jobless claims data.

Consumers spent more in July than they did last year, but the pace of spending slowed from June, as some states curtailed activity due to a resurgence of Covid-19. Economists expect retail sales rose 2.3% in July, after June's 7.5% increase, according to Dow Jones. Excluding autos, economists expect sales would have increased 1.2%. The Census Bureau is expected to release retail sales Friday at 8:30 a.m. ET. As of June, retail sales recovered from the sharp slump that came with the virus-related shutdowns in March, and were actually higher than last year's level. July's report will be important since there is concern that the spreading virus in the South and West in July may have hit consumer spending activity, which accounts for about two-thirds of the economy. "I think it will be another healthy report, not quite as strong as we saw in the prior month," said Aneta Markowska, chief economist at Jefferies. "Prior to the employment numbers, I was expecting some weakness in July, given the effect of the Covid resurgence, the fiscal cliff that we're in the middle of, and the stall in high frequency data." Th e economy added 1.8 million jobs in July , and the unemployment rate fell to 10.2%. Thursday's weekly jobless claims also reinforced a better-than-expected jobs trend, as claims fell to 963,000, below 1 million for the first time since mid-March. Michelle Meyer, head of U.S. economics at Bank of America, said Bank of America credit card data shows a slower pace of spending in July than expected in the economists' consensus forecast. She said she expects just a 1.5% increase in headline retail sales, and 0.3% when excluding vehicles. "The consumer was still spending certainly in the month of July, but not at the same rapid clip we saw in May and June when all the pent-up demand was being unleashed," said Meyer. June sales totaled $524.3 billion, a 1.1% increase from last year's level. Meyer said July card spending data showed a pullback in grocery spending. "There's still really strong spending on furniture and home improvement. Durable goods remains quite robust," she said. "There are contractors and there's do-it-yourself projects that all contribute to this home improvement spending. It is a budget reallocation. People have more dollars available because they're not spending on experiences." The retail sales data measures restaurant spending, but not travel or entertainment, two areas where consumers cut spending sharply. "What this pandemic has shown is there's been such a rapid reallocation of dollars," said Meyer. She said that in some categories, there's so much demand and inventories are so low that prices are rising, as evidenced in July's 0.6% increase in the consumer price index. "In other areas, demand is feeble and that's leading to inefficiencies." Cortera, a software company, tracks business-to-business spending, found spending rose sharply in some retail categories in July. Building materials and garden stores, for instance, increased their spending 25.3% over last year's level, and internet retailing expenditures were up 23.3%. Retailers that sell electronics and appliances increased spending by 17.8%, in response to the work from home trend. But Cortera found that spending by restaurants and bars was 37.4% below year ago levels in July, and clothing stores were down 16.3%. Economists say July was strong but they are concerned August may not be as good because of the reduction in unemployment benefits from the federal government. Congress was divided on how to deal with the expiration of a $600 a week payment to the unemployed to help them through the pandemic. Talks on an overall stimulus package have broken down and the White House has stepped in with executive orders that would pay the unemployed $300 a week from FEMA funds. It also has asked that states provide another $100 weekly in additional funds. "Even with the executive order, I don't think people are really going to see that money until the very tail end of August, and that's if we're lucky," said Markowska. "It's just going to take states awhile to figure out the legal and logistical hurdles. We're looking at late August, possibly early September." Economists said without the stimulus payments, which ended July 31, August is setting up to be a negative month for retail sales though they could recover in September as retroactive checks are received. Some economists say part of the improvement in continuing jobless claims data could have been because the enhanced payment ended. Continuing claims fell to 15.5 million from 16.1 million. They were 15.2 million on an unadjusted basis. "The expiration of the $600/week supplement to unemployment benefits from the FPUC program at the end of July may have made filing for benefits less attractive, leading to reduced filings," noted JP Morgan economists. They also said there may have been decline as some individuals reached the end of their benefits and are no longer eligible. But Joseph LaVorgna, chief economist of the White House's National Economic Council, said he does not believe the end of the weekly payments were a reason for fewer unemployment claims. He also said non-adjusted claims data is actually better than seasonally adjusted, which may not be valid during Covid-19 restrictions. He said the claims data and employment report show that the economy didn't stall out as some feared. "The May numbers took off like a rocket. June was great and it looks like the momentum carried on into July, and a lot of people thought that wasn't going to happen. It looks like he economy didn't miss too much of a beat in July. The momentum carried over," LaVorgna said.