Much has been made of the rebound in US retail sales seen in July. However, Katy Askew suggests, with high levels of unemployment and the growing prospect of food price inflation, the US economy is far from out of the woods. 

For the first time in four months, US consumers upped their levels of spending in July. According to data released yesterday (14 July) by the US Department of Commerce, total retail sales increased by 0.8% from the previous month. 

With US consumer spending accounting for about 70% of the country’s economic activity, the news has been welcomed by some as a positive signal for the country’s overall economic outlook.

Retail sales are a closely watched indicator of consumer sentiment and commentators have suggested resurgent US consumer confidence could make declining spending – like the 0.7% drop seen in June – a temporary blip, putting the country back on the road to economic recovery.

While the Department of Commerce reported that all major categories saw an uptick in sales, gains were driven by increased discretionary spending on sporting and hobby equipment as well as music and book sales, which rose by a total of 1.6%. 

Sales through food and beverage stores remained relatively flat – up just 0.3% – while grocery stores saw sales rise 0.4% on the month, the Department of Commerce revealed. 

According to the Consumer Price Index, which was released today, the cost of food increased just 0.1% in the period, meaning that inflation did not drive the increase seen in the dollar sales value of food items. While the cost of bread, beef and chicken all increased, the CPI revealed the price of dairy products and fruit and vegetables fell. 

These mild food price increases left consumers with more money to spend on discretionary items, raising hopes that economic growth will be boosted. 
However, a note of caution on the outlook for inflation must be sounded. 

Poor weather conditions are likely to severely reduce grain yields in the US. Soybean and corn harvests are expected to be significantly lower this year due to the drought that has ravaged the US farm belt. This is likely to result in a supply shortfall that will drive up grain prices. 

Higher grain costs will lead to increased production costs for a wide range of food products – from meats and poultry products to cereals and other processed foods.

Indeed, food manufacturers are already beginning to feel the impact of the rising cost of production. According to the Producer Price Index, which was released yesterday by the US government, the cost of producing “finished” foods (ie those that appear on grocery store shelves) rose by 0.5% in July. Wholesale corn prices jumped 34.5% in the month, the largest gain since 2006.

For the time being, it seems the sluggish economic outlook is keeping a lid on consumer food prices. Manufacturers are carefully balancing the need to push price increases through in order to shore up margins against the prospect that price hikes could result in lower volumes as US households respond by reducing consumption.

However, low prices are unlikely to last much longer as food manufacturers will increasingly look to pass the rising cost of production along the chain to consumers. 

This does not bode well for the overall health of the US economy.

As consumers are forced to spend more on essential food purchases, typically consumer sentiment drops and shoppers baton down the hatches. Add to this the high level of unemployment, which stands at a little over 8%, and it is likely the US will witness a decline in discretionary purchases while food sales volumes could also take a hit. If this happens, overall retail spending will once again turn negative.