Americans Tighten Their Belts: Weaker-Than-Expected Retail Sales

Amid high inflation and high interest rates, Americans kept a tighter grip on their wallets this spring and cut back on discretionary spending, which could have big repercussions for the economy ahead.

In May, retail sales came in weaker-than-expected at 0.1%, the Commerce Department reported. That is well below expectations for a 0.3% increase. What’s more the government downward revised April’s retail sales data to show a 0.2% decline.

Gold swung from negative to positive territory on the news, trading as high as $2,438.20 an ounce following the report’s release.

The latest economic data reveals that Americans have spent down their pandemic era savings and are now struggling to keep consumption going at a strong pace. The slowing trend in consumption also hits at a time when banks are tightening access to credit as lower income borrowers struggle to keep up with their monthly loan and credit payments.

As consumer spending powers nearly 70% of U.S. gross domestic product (GDP) growth, spending weakness can have wider economic repercussions and could lead to a broader economic slowdown.

Indeed, Wells Fargo Economics recently lowered their second quarter estimate for real consumer spending growth to 1.9% from 3.0%, previously. Looking ahead, the firm forecasts that the pace of consumer spending growth will run below a 2% annualized pace in the second half of 2024, as consumers and businesses pull back on purchases and spending ahead of the November presidential election.

The slowing retail sales number bolsters market expectations that the Federal Reserve will need to step in later this year and slash high interest rates to help boost the slowing economy.

At the June meeting, the Fed kept its benchmark interest rate at the 5.25%-5.50% range, where it has stood since last July. After projecting as many as three or four rate cuts at the start of the year, policymakers now only forecast one rate cut in 2024. However, even or two rate cuts would do little to help borrowers as interest rates still remain relatively high compared to recent decades.

Fed interest rate cuts are typically supportive to the gold market and could help trigger another new rally phase in precious metals.

Bank of America expects silver prices to climb to $35 an ounce within the next two years. Silver currently trades around $29.50 an ounce. While gold has performed strongly in recent years as investors around the globe turned to the yellow metal to hedge against inflation, stock market volatility and geopolitical risks, Bank of America now expects silver to begin a new leg up.

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