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Analyst: Some warning signs in June sales

The retail economy ended the first half of the year on a positive note with a strong set of June numbers. Overall, retail sales rose by 6.3% on an unadjusted year-over-year basis. Below that headline figure, foodservice put in a good performance with a 9% increase over the same period last year, while automotive sales continued to advance with an increase of 5%. Sales at gasoline stations rose by a colossal 20.8%, the fastest increase since September 2011 -- driven by both higher prices and some volume increases across parts of the country.

Pure retail, which excludes foodservice, gasoline, and automotive sales, rose by 4.2%. This is a solid uplift but one that is slightly below average growth for the year-to-date, even though it comes off the back of weak prior year comparatives. It is also notable that pure retail's share of all retail spending fell to its lowest proportion in over four years. In our view, this suggests that while retail is doing well thanks to a robust economy, it is not necessarily benefitting from gains as much as other categories.

Part of the reason for retail's underperformance is likely down to elevated gas prices, which have eaten into some of the benefits from tax cuts and modest wage growth. This has made consumers a little more careful about their spending on other things, and retail has been an obvious area in which to show relative caution. However, this does not serve as a complete explanation, if only because consumer confidence remained robust throughout most of June and spending on areas like foodservice accelerated.

Another part of the explanation lies in the fact that although consumers are still willing to spend in this period of strong economic growth, they are somewhat less prepared to do so on retail goods than they are on experiences like eating out or other leisure activities. This really comes down to the experience economy versus the product economy, with the former being a much more compelling investment for many households. In our view, a lot of retailers are still not providing a good enough experience or a compelling enough range of products to persuade consumers to be more profligate.

None of this should suggest that retail is not doing well. The rising tide of a robust economy is helping to float all boats, with even traditionally sluggish sectors like apparel posting a very respectable 4.6% uplift in sales for June. Meanwhile, despite some temporary weakness in the housing market, sales of home goods remain firmly in positive territory with an increase of 4.4%. Even the normally beleaguered department store segment, managed to eke out a 0.4% increase in year-over-year sales. All in all, these are not bad times for retailers.

However, the point about retail losing out on a relative basis remains important. It suggests that should this period of economic good fortune come to an end, retail will be one of the areas consumers quickly deprioritize and cut back on. As such, the question is: are these good times set to continue?

In our view, there is nothing to suggest an abrupt slowdown. However, there are some early warning signs that we may be in for a period of slower growth as we move into the second half of the year. Foremost among these signals is a downtick in consumer sentiment. Our own indicators suggest that consumers are now more concerned about the economic outlook with both higher inflation, especially from gas prices, and the impact of tariffs weighing on their minds.

Higher gas prices and rising inflation also have the potential to undo much of the benefit of tax cuts. This means consumers will have little headroom to boost their spending, especially as wage growth remains moderate. An increase in consumer credit could provide a stopgap -- and indeed household debt already rose sharply in May and June -- but given the already high levels of indebtedness and rising interest rates, this can only serve as a temporary solution.

The other thing to note is that as we approach the back end of the second half, prior year comparables become much tougher. This will, by itself, deflate growth rates. If it coincides with a period of softer demand, it could produce some relatively weak figures.

For all of these warnings, we do not believe retail will perform terribly. However, we do think there are some chill-winds on the horizon that could reverse the bounce back in some traditionally weak sectors like department stores. Just as a rising tide floats all boats, an ebbing tide has the potential to ground some vessels.
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