June turned out to be a solid month for US retailers: retail sales again beat expectations, rising by 7.5% MoM against the forecast of 5%. However, partial reinstatement of lockdowns and related firm closures, rising unemployment and looming end of the pandemic unemployment benefits program suggest that momentum in consumer spending may soon begin to fade.
Continuing comeback in retail spending is so impressive that in just two months, retail sales have almost completely shrugged off the coronavirus shock returning to pre-Covid level:
Rebound in spending came despite steep and persistent decline of employment level which suggests that without extension of fiscal stimulus, consumption may collapse as quickly as it rebounded. The last statement is supported by negative correlation between income level and rebound in consumer spending. For example, spending of low-income households is now just -1.9% below the February level while for households with middle-income level spending is -5.5% below the norm. Consumer spending of high-income households is -10.8% below the pre-Covid level.
The end of fiscal stimulus, obviously, will primarily hit low-income spending cohort, which is the main driver of spending. This is an additional argument in favor of extending the stimulus as otherwise US government risks to nullify recovery progress.
July may turn out to be bad month for retail sales, as small businesses have already started to “lose ground” due to partial recovery/rollback of lockdowns. US small business revenue began to decline in late June, as did the number of job openings:
As the Fed warned, the recovery is indeed starting to plateau and small businesses seem to be the first to crack. However, the market tends to discount such news, or vice versa, price them in a “perverse” form, as bad data only increases the odds that Congress will approve a new fiscal stimulus package which can be even bigger than before. Of course, this will create additional downward pressure for USD as we approach the date of expiry of key stimulus programs.
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