U.S. Retail Sales Declined 0.3 % in May 2022

Consumers pulled back on car purchases, online shopping, and spent more at gasoline stations

By guest authors Harriet Torry and Rina Torchinsky from the Wall Street Journal.

All captions, graphics and video courtesy by the Wall Street Journal

Americans’ retail spending declined in May, as consumers felt the pinch from inflation, higher gasoline prices and rising interest rates that make car purchases more expensive.

Retail sales—a measure of spending at stores, online and in restaurants—fell a seasonally adjusted 0.3 % in May from the previous month, the Commerce Department said Wednesday. That was the first decline in month-over-month retail spending this year.

A sharp drop in vehicle sales—due to high prices, low inventory and rising interest rates on car loans—played an outsize role in the decline in month-over-month retail spending. Consumers also pulled back their spending on goods such as furniture, electronics, and online purchases.

Excluding autos and gasoline, retail sales rose just 0.1 % in May, well behind the pace at which prices increased last month. Unlike other reports compiled by the government, retail sales aren’t adjusted for inflation. Soaring gasoline and grocery prices meant households shelled out more on them in May—Americans are spending over 43% more on gasoline than a year ago and nearly 9% more on groceries.

Inflation—which is rising at the fastest pace in four decades—appears to be eroding Americans’ incomes, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. “People are losing ground here in terms of their economic wellbeing,” he said. “You would expect people to begin to watch what they spend in that environment.”

Retail sales were up 8.1% last month from a year earlier, a robust gain but below the blistering pace of inflation, which was up 8.6 % in May from a year earlier, according to the Labour Department’s consumer-price index.

Interest rates look set to rise further, a potential damper on consumer spending in the months ahead as car loans and credit-card debt get more expensive. Later Wednesday, the Federal Reserve is set to wrap up a two-day policy meeting. A string of troubling inflation reports in recent days is likely to lead Fed officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest-rate increase.

Consumers are getting less for their money due to rapidly rising prices. The dynamic is also driving a shift from discretionary purchases such as furniture and electronics to essentials like food and gasoline.

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The average cost of a gallon of regular gasoline exceeded USD 4.60 a gallon in late May, up from about USD3 a gallon a year earlier, according to the U.S. Energy Information Administration. Prices in June have risen above USD5 a gallon.

Logan CoBell, 33 years old, who works in Chicago as a bartender and substitute teacher, said he is driving only for essential reasons, such as commuting to work, to save money on gasoline. He is watching his spending at the grocery store by cutting down on purchases of red meat and opting for cheaper alternatives such as pork and nonorganic chicken.

Mr. CoBell said he was holding off on upgrading to a new computer “so I have cash in hand just in case something weird happens, like another shutdown.”

Companies are struggling with higher inflation, which they say is increasingly hard to pass on to consumers. Some large retailers such as Walmart Inc. and Target Corp. in recent weeks reported steep profit declines as rising supply-chain, wage and inflation-related costs ate into earnings.

Inflation and high fuel prices are also taking a toll on consumer confidence. Last week the University of Michigan reported that an index of consumer sentiment dropped in June to its lowest point since the inception of the survey in the late 1940s.

Consumers are also continuing to shift spending to services from goods as many Americans resume more in-person activities such as travel and dining out.

The retail sales report mostly covers spending on goods rather than services, but it said that receipts at bars and restaurants were up 0.7% in May, a sign that Americans are continuing to dine out.

Consumer spending accounts for about 70% of U.S. economic output. A strong labor market and rising wages have helped support spending on services, for which there is pent-up demand from the pandemic.

Craig Johnson, president of Customer Growth Partners, a research and consulting firm, said he anticipates a slowdown in retail spending.

“We’re in a little bit of a watershed in terms of what’s going to happen to the economy,” Mr. Johnson said. “The American consumer—she’s very resilient, but she’s not infinitely resilient.