Sagging Retail Sales: Another sign Americans may be tapped out

It's starting to get difficult for the most optimistic cheerleader to pretend this economy is "robust."

We got more evidence today that the American consumer is tapped out.

And that's really bad news for an economy that depends on consumers buying stuff to keep rolling along.

Retail sales grew at a tepid 0.1 percent in May. That was below the expectation for a somewhat less tepid 0.2 percent gain. And if you factor out autos, retail sales fell by 0.1 percent.

Meanwhile, April retail sales were revised down from flat to a decline of 0.2 percent.

On an annual basis, retail sales have increased by just 2.3 percent.

You might look at that number and think, 'Well, that's great. People are still buying more stuff.'

But that raw retail sales data doesn’t tell the whole story because it isn’t adjusted for price inflation. In reality, Americans are forking out more money than they were last year, but they’re buying less stuff.

Retail sales always reflect rising and falling prices, along with the volume of stuff consumers buy.

When price inflation is high, retail sales tick higher, unless consumers cut back spending enough to offset rising prices. During deflationary periods (falling prices), retail sales fall, all things being equal, unless people up their volume of purchases enough to offset falling prices.

In other words, just because dollar widget sales increase doesn’t mean people bought more widgets. It could be that they bought fewer widgets but paid a lot more for them. Conversely, falling sales could reflect price drops and don’t necessarily mean people purchased fewer widgets.

When you factor in an annual CPI of 3.3 percent, it's clear that Americans aren't even keeping up with rising prices.

Looking at the internals, it appears Americans are cutting back on discretionary spending. Sales at bars and restaurants fell by 0.4 percent. Home furnishing retailers saw sales fall by 1.1 percent.

Are American consumers reaching their spending limit?

Not only are retail sales falling, but we've seen a sudden dropoff in the increase of consumer debt over the last few months. Revolving debt, primarily reflecting credit card balances, contracted by $500 million in April, saw a 0.4 percent decline.

That may well indicate Americans are starting to max out their credit cards.

American consumers are currently buried under 1.34 trillion in revolving debt alone. When you factor in non-revolving credit including student and vehicle loans, and borrowing for other big-ticket items, Americans owe $5.05 trillion. That doesn't even factor in mortgages.

Americans used stimulus money handed out during the pandemic to pay down credit cards and beef up their savings. Then prices started surging.

As prices skyrocketed, Americans blew through their savings to make ends meet. Aggregate savings peaked at $2.1 trillion in August 2021. As of June 2023, the San Francisco Fed estimated that aggregate savings had dropped to $190 billion.

In other words, Americans ran through $1.9 trillion in savings in just two years.

Then they turned to credit cards.

Now it appears they have maxed out the plastic. We see this in both the consumer debt data and sagging retail sales.

This soft landing may be about to get a little bumpy.