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Consumers continued to spend in June but at a weaker pace than expected. Retail sales increased 0.2% last month, less than half the pace of May. Sales increased in seven out of 13 retail categories, most notably for non-store retailers (i.e., internet sales), electronics stores and furniture outlets. Internet sales were likely boosted due to unseasonably hot weather across the country and Amazon’s Prime Day event. On the flip side, sales fell at building material stores, gas stations, sporting goods and grocery stores. Auto sales rose just 0.3%, the slowest performance in three months. Economists had been expecting a larger increase after Wards Automotive Group reported a 4% gain in auto sales in June. The smaller increase within the retail sales report likely reflected a drop in reduced pricing rather than the number of autos sold. Perhaps the most concerning aspect of the weak report, in my opinion, was a 0.1% increase in spending at restaurants and bars. This sector is the main proxy for services in the report and the small increase seems to be sending a warning sign about consumers’ discretionary spending habits. The services sector has been carrying the economy over the past year but is beginning to show weakness.
In addition to the pullback in "dining out" spending, other signs of strains are starting to show. Credit card balances were up 13.1% for June compared to a year ago, while the average credit card balance for active accounts increased 8.7%, according to PSCU’s Payments Index. The credit card delinquency rate for June was 1.94%, 20 basis points above the June 2019 pre-pandemic level. Delinquency rates may rise and spending may slow now that the student loan forgiveness program has ended, and borrowers will have to resume monthly payments this October. June’s weaker-than-expected retail sales activity may be the beginning of a pullback, giving borrowers some cushion before student loan payments resume.
Key Indicators this Week
Housing – Housing starts fell 8% in June, slightly better than estimates but a significant reversal from the 15.7% surge in May. Building permits were down 3.7%, also a reversal from the prior month’s gain of 5.6%. It all has to do with costs and interest rates. Builders continue to see demand from prospective buyers but are facing rising material costs. The Canadian wildfires pushed lumber prices up 15% since May, a shock after prices finally recovered last year from the pandemic surge. Delivery times have also slowed considerably, making it difficult for builders to begin construction. Mortgage rates are, as expected, keeping some homebuyers from pulling the trigger.
High interest rates are creating a bigger problem for the existing home sales market. Home resales fell 3.3% in June to the lowest pace in five months. The number of homes on the market remained at 1.08 million, the lowest June inventory on record. The median home price rose to $410,200, the second highest on record. With only a tenth of outstanding mortgages at 6% or higher, it is easy to understand the problem – few people are willing to give up an historically low mortgage rate even if they might want to move. Mortgage rates fell 20 basis points last week but remain just below 7%.
What's Next – The Federal Open Market Committee (FOMC) begins its two-day meeting on July 25. It is fully expected that the committee will raise the benchmark lending rate by 25 basis points to a range of 5.25%-5.50%. All ears will be tuned in to the FOMC message on Wednesday, July 26.
Sarina Freedland – Senior Investment Officer
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