Kiplinger's Retail Outlook: Consumers Are Still in the Game

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Retail and food service sales rose 0.4% in April, the first increase in three months, showing that consumers are still spending, despite all the talk of recession. E-commerce was strong, and general merchandise sales bounced back in April after a March swoon. Sales of cars, light trucks and SUVs jumped, nearly equaling their highest level in two years. So-called core sales (excluding motor vehicles, building materials and gasoline) increased a strong 0.7%. Even after adjusting for inflation, core sales were up 0.6%. Restaurant sales continue to climb, which is another indicator that consumers are not yet cutting out non-essentials. However, not all the news was good: Sporting goods and hobby store sales fell heavily, and sales at clothing and grocery stores declined.

Consumer spending on goods will still likely grow this year, but only modestly. We expect a general slowdown in retail as consumers switch their buying patterns to more services. Purchases of goods soared at the beginning of the pandemic in 2020. While services have picked up since then, the share of goods in household spending is still well above its pre-pandemic norm. That suggests a coming drop in goods buying later this year as the economy slows. 

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A better gauge of consumer willingness to spend will therefore come from the monthly personal income and consumption reports that include spending on services. These are typically released at the end of each month, with the report for April being scheduled for May 26. The retail sales report includes spending at restaurants, but not other services. Consumer spending on services is still on an uptrend, though growth has been slowing. 

For now, consumers seem pretty resilient, despite analyst expectations of a slowing economy because of the Federal Reserve’s interest rate hikes. Rate hikes will hurt motor vehicle purchases and home improvement spending, but consumer willingness to spend in general shows that any recession later in the year is likely to be mild.  

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