US: Modest Growth in Retail Sales, but Solid Gains in Manufacturing Output

US consumer spending seems to be cooling down. May is the second month in a row with total monthly sales below the consensus forecast. Sales had been expected to grow by 0.3%. That said, the situation is hardly dire, and the contraction seen in May was not widespread. Declines were largely concentrated in furniture stores (-1.1%) and building materials stores (-0.8%), in addition to an unexpected slide by food services (-0.4%). The decreases in the first two categories are no surprise, given the high interest rates and slowdown in term credit. Households have also used up the excess savings they accumulated over the pandemic. At the same time, May's numbers don't suggest that households are further limiting their discretionary spending: leisure goods stores jumped 2.8%, their strongest monthly gain since February 2022. Electronics and appliance stores (+0.4%), clothing stores (+0.9%) and nonstore retailers (+0.8%) also performed well in May. The situation also appears less gloomy once we adjust for the price fluctuations in different retail categories. Real retail sales rose 0.3% in May after dropping 0.3% in April. That said, if we look at the entire second quarter to date, retail sales data for April and May point to relatively slow growth in real consumption.

May's solid growth in industrial production was fairly predictable, given the rise by hours worked in manufacturing over the last month. Even so, it's a welcome result—this was its best monthly growth since July 2023. The gains come from increases in the mining sector (+0.3%) and energy production (+1.6%), as well as from a 0.9% jump in manufacturing. The machinery sector advanced 2.3%, the sector's biggest monthly growth since December 2021. This could be a sign that investment in equipment is picking up, following increased construction spending in manufacturing in 2023, the result of the federal government's efforts to spur growth in the industry. Still within manufacturing, there were strong increases in the petroleum and coal products (+2.8%) and chemicals (+1.8%) sectors. It remains to be seen whether the momentum will continue in the months and quarters ahead.

May's retail sales results were a bit disappointing, although in real terms, the situation appears less bleak. All the same, consumption does seem to be faltering. But it's interesting to see that business could pick up some of the slack, as suggested by the gains in manufacturing output. This data doesn't really change much for the Federal Reserve, which should still wait until its last meetings of the year before beginning to cut its key interest rates.