• Retail sales were up 0.3% in May for the second straight monthly increase. Sales growth was solid across segments.
• April’s increase of 0.4% was unrevised while March’s decline was downwardly revised to 0.9% from 0.7%.
• Consumer spending is set to cool later this year as the U.S. economy weakens.

Nominal retail sales rose by 0.3% in May from April after increasing by 0.4% in April, according to data from the Commerce Department. The retail sales increase in April was unrevised at 0.4% while March’s decline was downwardly revised to 0.9% from 0.7%. The consensus expectation was for a 0.2% decline in May. The details of the May report were good; sales excluding autos were up 0.1% and sales excluding autos and gasoline were up 0.4%. Control sales, which strips out volatile components such as food services, autos, gasoline, and building materials, rose 0.2% in May after increasing 0.6% (revised from +0.7%) in April. Control sales go into nominal spending in GDP.

Nine out of 13 retail categories rose last month, including motor vehicle and part dealers (1.4%), building materials (2.2%), general merchandise (0.4%), and non-store merchandise (0.3%). A lack of semiconductors and labor shortages weighed on auto production in the first couple of years of the pandemic. However, production has improved in the past year and sales of motor vehicles and parts were up 4.4% in May from May 2022, after rising 1% in 2022.

Nominal retail sales are up 2% this year thanks to a strong job market, price increases, and solid consumer balance sheets. But control retail sales growth is slowing. With the Fed now signaling a higher fed funds rate at the end of 2023, PNC Economics expects retail sales to decline in the second half of the year as rising interest rates weigh on interest-sensitive goods such as autos, building materials, and appliances. Spending will likely continue to shift away from goods toward services. Risks to the outlook are tilted to the downside. Persistent inflation, higher-than-expected interest rates, or a substantial tightening in lending standards will result in a bigger decline in retail sales this year.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.