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US grocery prices on the rise amid global disruptions
00:40 - Source: CNN
Washington, DC CNN  — 

Spending at US retailers rose last month, in a sign that consumers are still fueling the economy.

Retail sales at stores, online and in restaurants grew 0.3% in May from April, the Commerce Department reported on Thursday. That’s above economists’ expectations of a 0.1% decline, according to Refinitiv. Retail sales data is adjusted for seasonality but not for inflation.

The report reflects resilient consumer spending despite rapid interest-rate hikes and lingering economic uncertainty.

Spending grew across every category, except at gasoline stations and miscellaneous stores. Excluding sales at gasoline stations, retail spending increased by a faster clip of 0.6%. Sales of building materials and gardening items jumped the most, by 2.2% in May from the prior month. From a year ago, overall retail sales rose 1.6% in May.

Brian Field, global leader of retail consulting and analytics at Sensormatic Solutions, said that foot traffic at US retailers has remained robust and hasn’t shown any signs of abating.

“The fact that the number of visits to stores has remained flat year over year suggests that consumers are not significantly affected by the current economic issues,” Field wrote in a statement to CNN. “This observation indicates that shoppers continue to engage with physical retail locations, displaying consistency in their behavior.”

An expected weakening in consumer spending

The better-than-expected retail sales report adds to signs that US consumers aren’t ready to tap out just yet — though economists think they eventually will. Higher interest rates, tightening credit conditions and the resumption of student loan payments are bound to weigh on Americans as they run down their savings accounts and rack up more debt.

“The big temporary boosts that a lot of lower and middle-income households got from pandemic relief is gone and these households have been operating hand-to-mouth, so there eventually won’t be enough to maintain their spending,” said Joshua Shapiro, chief US economist at forecaster Maria Fiorini Ramirez.

Federal Reserve officials expect economic output to be weaker in 2023 compared with the prior year, according to the Fed’s latest Summary of Economic Projections released on Wednesday.

“The economy is facing headwinds from tighter credit conditions for households and businesses which are likely to weigh on economic activity and inflation,” Fed Chair Jerome Powell said in his news conference after officials voted to hold the key federal funds rate steady, while hinting that more rate hikes might be necessary this year.

Impact of the labor market

While retail sales held up in May, spending has erred on the weaker side after a big jump in January. Spending largely hinges on the state of the labor market, which remains solid overall, but companies in white-collar industries continue to shed workers. Grubhub is laying off 400 corporate employees, about 15% of its workforce.

“There is still going to be this focus from businesses on trying to reduce costs and that is going to result in more unemployment,” said Thomas Simons, senior economist at Jefferies. “And of course as those upper-middle-income earners lose their jobs, there’s going to be a big pullback in overall spending.”

While the job market has remained steady, inflation has slowed in recent months. The closely watched Consumer Price Index rose 4% in May from a year earlier, a sharp pullback from April’s 4.9%. Inflation’s retreat might just hold up spending if hiring doesn’t cool along with it.

“With prices rising at a more manageable pace, consumers may feel more confident in their purchasing power, potentially bolstering retail sales,” said Deborah Weinswig, chief executive officer of analyst group Coresight Research. “The gradual stabilization of consumer prices could provide a favorable backdrop for retailers to attract customers and drive economic growth.”