Retail Sales Signal Slowing Consumption as Existing Sales and Housing Starts Soften

Key Takeaways:

• Retail sales and food services rose 0.1 percent in May but were revised downward in April, according to the Census Bureau. Gains in sales at motor vehicle and parts dealers (+0.8 percent), sporting goods, hobby, book and music stores (+2.8 percent) and nonstore retailers (+0.8 percent), helped offset declines in sales in building materials, garden equipment, and supply dealers (-0.8 percent), restaurants and bars (-0.4 precent) and a price-related 2.2 percent decline in gas station sales. Control group retail sales (excluding food service, auto, building supplies, and gas station sales) rose 0.4 percent but were downwardly revised in April.
• Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, rose 0.8 percent in May, according to the Federal Reserve Board. Manufacturing activity rose 0.8 percent to the highest output level in a year. Mining output rose 0.3 percent, while utilities output was up 1.7 percent.
• Existing home sales declined 0.7 percent to a seasonally adjusted annualized rate (SAAR) of 4.11 million in May, according to the National Association of REALTORS® (NAR). The number of homes available for sale climbed 6.7 percent to 1.28 million, the highest level since August 2022. The slow sales rate combined with increased inventory pushed the months’ supply up two-tenths to 3.7, the highest level since the onset of the pandemic. The NAR’s measure of the median sales price of existing homes rose 5.8 percent compared to a year ago.
• Housing starts declined 5.5 percent to a SAAR of 1.28 million in May, the slowest pace since the onset of the pandemic, according to the Census Bureau. Single-family starts declined 5.2 percent to a SAAR of 982,000, the slowest pace in 7 months, while multifamily starts declined 6.6 percent to a SAAR of 295,000. Single-family permits continued their downward trend for the fourth consecutive month, falling 2.9 percent to a SAAR of 949,000. Multifamily permits were down 5.6 percent to a SAAR of 437,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined 2 points to 43 in June, the lowest level since December. The index for sales in the present declined 3 points to 48, while the index for sales in the next six months was down 4 points to 47. The index for the foot traffic of prospective buyers declined 2 points to 28.

Forecast Impact:

Retail sales came in weaker than we had expected, especially when considering the downward revision to April’s data. This adds to evidence that previous consumer resilience is softening, which may lead to a downward revision to our near-term consumption forecast. The industrial production report was more positive with the strong gain in manufacturing output, but given evidence of both slowing consumption growth and other surveys suggesting weak manufacturing activity, we doubt the strength in May will be sustained.

Existing sales in May were near our second quarter forecast. While affordability continues to weigh on demand, the only-modest decline in sales, despite a general rise in mortgage rates over the corresponding contract signing period, suggests that existing sales are near their “floor.” With mortgage rates moving back under 7 percent in recent weeks, we expect some improvement in the sales rate in the second half of the year. Single-family starts were somewhat below our Q2 expectations but in line with our broader forecast for some slowing in new construction, as the pace of new home sales has softened in recent months. Given the continued decline in permits along with the lowest homebuilder confidence reading this year, we are likely to downgrade our near-term single-family starts forecast. We also expect multifamily construction to remain modest for the foreseeable future, as rent growth in many of the larger markets is soft and construction financing relatively tight.

Nathaniel Drake
Economic and Strategic Research Group
June 21, 2024

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