May retail sales rise 0.1%, weaker than expected

Retail spending was weaker than expected in May as consumers continued to wrestle with stubbornly higher levels of inflation.

Sales rose just 0.1% on the month, one-tenth of a percentage point below the Dow Jones estimate, according to a Commerce Department report Tuesday that is adjusted for seasonality but not inflation. However, the result was slightly better than the downwardly revised 0.2% decline in April.

On a year-over-year basis, sales rose 2.3%.

The sales number was worse when excluding autos, with a decline of 0.1% against the estimate for a 0.2% increase.

Moderating gas prices helped hurt receipts at gas stations, which reported a 2.2% monthly decline. That was offset somewhat by a 2.8% increase at sports goods, music and book stores.

Online outlets reported a 0.8% increase, while bars and restaurants saw a 0.4% decline. Furniture and home furnishing stores also reported a 1.1% drop.

Stock market futures were around flat following the report while Treasury yields declined.

The report comes with investors on edge about the direction of the economy and what that will mean for the future of monetary policy at the Federal Reserve. Consumer spending is responsible for about two-thirds of all economic activity, so any weakness could signal a retrenchment in growth while also pushing the Fed to begin cutting interest rates.

Inflation numbers of late have been somewhat encouraging, but spending is showing signs of weakening as consumers have been under pressure from rising prices for more than two years.

A Commerce Department measure that the Fed uses as its main gauge for inflation showed an annual rate of 2.7% in April, or 2.8% when excluding food and energy. The Fed targets 2% inflation.

Market pricing is pointing to the equivalent of two interest rate reductions this year of a quarter percentage point each, though Fed officials at their meeting last week indicated the likelihood of just one. Following the retail data, traders in the fed funds futures market upped their bets that the Fed would be easing, even pricing in about a 23% chance of three cuts this year, according to the CME Group’s FedWatch gauge.

Philadelphia Fed President Patrick Harker said Monday that it would be appropriate to cut rates later this year only if the data cooperates, and said he envisions the likelihood of just one move lower.