Do Soft Retail Sales Indicate US Consumers Are Reaching Their Limits?

U.S. retail sales slowed more than expected in April, leading some economists to ask whether consumers are wearing out after their spending supported surprising economic growth over the past several months.

The Census Bureau reported Wednesday that April retail sales were $705.2 billion, virtually unchanged from the month prior and well below the 0.4% increase economists expected.

“Consumer spending is slowing as elevated interest rates weigh on rate-sensitive spending and as the labor market cools,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.

Despite interest rates being at their highest levels in decades, consumer spending was strong in the first quarter, with shoppers being one reason the long-forecast recession never arrived. But April’s shift in retail sales has some economists asking if consumers are getting tired.

“The fact that retail sales stalled in April is not necessarily a sign the consumer is spent; but for once at least it does not show continued evidence of an unstoppable consumer,” wrote Wells Fargo economists Tim Quinlan and Shannon Seery Grein.

Depleted Savings, High Debt and Slowing Job Growth

The retail sales report was driven by a slowdown for online retailers that economists said could be partly attributed to an Amazon (AMZN) sales event in March. The earlier timing of Easter this year could also affect year-over-year comparisons.

However, several economists also said the data pointed to consumers who are running out of steam.

“Depleted excess savings, record household debt and a significant slowdown in job growth caused consumers to throttle back their spending last month,” said BMO Senior Economist Jay Hawkins. 

The gains in sales over the past year may be more due to inflation than increasing sales, said Morning Consult Retail & E-Commerce Analyst Claire Tassin. The retail sales report is not adjusted for inflation and Tassin noted the 2.7% increase in sales from last April was below the 3.4% consumer price inflation rate over the same period. 

“That indicates that the sales gains from a year ago are entirely attributable to inflation, not increased consumer demand,” Tassin said. 

Does This Affect the Fed’s Interest Rate Decisions?

While slowing retail sales may seem like a negative for the broader economy, it could also portend a reduction in inflationary pressure, which would be welcome news for consumers and could prompt the Federal Reserve to consider cutting its benchmark interest rate.

Fed officials have increased their influential fed funds rate to a 23-year high in order to restrict inflation. High interest rates are designed to slow consumer spending by making it more expensive to borrow money.

Inflation tumbled in 2023 but progress has stalled so far this year, as prices have continued to increase. Officials have said they need to see more data showing interest rates having the desired impact before moving to cut their interest rates.

“Fed officials will likely see this morning’s data as a partial offset to the persistently elevated inflation environment,” wrote Nationwide Financial Markets Economist Oren Klachkin.

A separate release Wednesday showed that inflation rose at a slower rate in April than the month before. The consumer price index for April rose at an annual rate of 3.4%, down from 3.5% in March but still well above the Fed’s long-term annual target of 2%.