Investing.com - Analysts from Wells Fargo (NYSE:WFC) on Tuesday noted that May's weaker than expected retail sales data suggests a softening in consumer spending.
Retail sales data for May came in slightly lower than expected, increasing by just 0.1%. Moreover, there were downward revisions to the data from previous months, implying a weaker spending environment in the second quarter.
Despite this, Wells Fargo analysts believe that the situation isn't as bleak as it seems, arguing that the perceived weakness in May can be partially attributed to declining goods prices, which suggests that inflation-adjusted sales were likely higher than the data imply.
The details of the sales data reveal a mixed picture. Sporting goods stores saw the most significant gain with a 2.8% increase in sales, reversing two consecutive months of decline. Auto sales also contributed positively, growing by 0.8%. However, when auto sales are excluded, overall sales decreased by 0.1% last month.
The analysts further note that a 0.4% drop in food services store sales, predominantly restaurants, is a concerning indicator of the leisure-side of the economy. Inflation-adjusted restaurant sales are down 2.5% year-to-date through May, according to their estimates.
Despite these challenges, Wells Fargo analysts maintain that the May retail sales data signifies a consumer that is only gradually losing momentum. They highlight that broader control group sales, which feed directly into the BEA's calculation of real goods spending in the national accounts and exclude autos, gasoline, building material, and food services store sales, rose by a stronger 0.4% in May.
However, they anticipate a consumer slowdown ahead due to factors such as slowing revolving credit uptake, rising delinquencies, moderating income growth, and increasing consumer pessimism about their financial situations. They also note a shift in consumer behavior, with growth in non-discretionary purchases beginning to outpace discretionary ones, a trend echoed by retailers in their latest earnings reports.