A Goldman Sachs team led by senior economist Jan Hatzius pointed out in its latest report that U.S. consumer-facing companies maintained healthy sales growth in the second quarter. Driven by larger-than-expected tax refunds, the median second-quarter sales of S&P 500 non-essential consumer goods companies rose 5.9% year over year, while median sales of essential consumer goods companies grew 3.9%. The strong performance of consumer spending was broad-based, with same-store sales accelerating across companies catering to both low-income and high-income consumers.
However, dark clouds are forming ahead. The Hatzius team expects real consumption growth to slow to 1% to 1.5% in the second half of the year, essentially a pullback from the abnormally strong tax-refund-driven pace in the spring to a more sustainable level. July retail sales fell 0.6% month over month, the steepest decline in 14 months, while the control group sales, which are more closely linked to GDP accounting, declined 0.4%. But there are indeed technical factors at play, such as Prime Day being moved up to June and previous excess tax refunds pulling forward consumption. Moreover, U.S. real GDP still grew at an annual rate of 1.5% in the second quarter, while personal consumption expenditures increased 3.2%.
The earnings season kicking off this week, centered on the results of retail giants such as Walmart (WMT) and Target (TGT), has become one of the most important micro-level windows for verifying whether the U.S. economy can continue on its path of “soft rather than hard landing.” Goldman Sachs’ judgment that consumer spending will slow in the second half of the year will face an important test from the earnings and outlooks of Home Depot (HD), Lowe’s (LOW), Walmart, and Target. Deutsche Bank analysts noted in a report that, against a backdrop of cautious consumer sentiment and potentially more frequent promotional activities, achieving further above-expectation sales growth will become more difficult.
Notably, the U.S. economy grew at an annualized rate of only 1.5% in the second quarter, a further slowdown from the 2.1% pace in the first quarter. However, personal consumer spending accelerated to an annualized growth rate of 3.2%, up from the weak 0.5% performance in the first quarter, becoming the primary growth engine for private domestic demand. Household spending was driven by both goods and services consumption, with particularly notable increases in spending on prescription drugs, motor vehicles, and dining services.
The triple cooling of retail, employment, and inflation is forming a chain of evidence unfavorable to hawkish rate hikes. July CPI rose only 0.1% month over month, core CPI rose 0.2%, and year-over-year core inflation fell to 2.5%; PPI was flat month over month, significantly below expectations, and fell to 4.7% year over year from 5.5%; combined with July nonfarm payrolls unexpectedly declining by 23,000, the case for the Fed to “immediately tighten again” has weakened notably. As of August 17, the probability of a September rate hike priced by CME had fallen to about 33%, compared with 51.2% a month earlier. This is highly consistent with Hatzius’s judgment that “unless August data take a dramatic reversal, a September rate hike is now very unlikely.”
If retail giants like Walmart report results proving that the household sector is merely slowing down rather than stalling out, the market will receive the combination most favorable to risk assets—consumption no longer creating inflationary pressure, corporate profits not collapsing, and the Fed not needing to further raise the risk-free rate. This would be particularly beneficial to long-duration tech stocks and AI infrastructure assets.
