Consumers doing 'lockdown projects' & 'government aid' drive June retail sales to surge 7.5%: Economist

Chris Low, FHN Financial Chief Economist joins The First Trade with Alexis Christoforous and Brian Sozzi to discuss July’s retail sales report from the U.S. Census Bureau.

Video Transcript

BRIAN SOZZI: Retail sales climbed 7.5% in the month of June. That's compared to revised monthly sales in May of 18.2%. Here to discuss that more is Chris Low. He's a Chief Economist at FHN Financial.

Chris, good to see you this morning. Lots of comeback in this report. But one number stood out to me, among many, building materials up 17.3%.

These are not-- these are not cheap products when you go to a Home Depot and Lowe's. It costs $40,000, $50,000 to redo your kitchen if you want to do it right. Who-- who is driving that gain? And how are those sales coming about?

CHRIS LOW: Well, that's absolutely one of the strongest sectors and has been for months. Even April when everything was down, it wasn't down as much as anything else. Solid double-digit year-on-year gain as well. And who's driving it? It's people who are doing lockdown projects.

If you talk to people at garden centers, for example, they're selling more plants than they have ever. But it's also, I think, an indication of how strong government aid has been in this recession. It's the first time we've ever seen a recession where income has risen despite output declining. Record negative quarter for GDP, but we will have an income increase.

ALEXIS CHRISTOFOROUS: Well, that leads me to my next question, what if we don't get that extension in unemployment benefits at the end of this month? Are we going to see a dramatic pullback in consumer spending? And will these retail sales numbers quickly reverse, Chris?

CHRIS LOW: Look, that's a great question. If you go back to the global financial crisis, the-- what we call the Great Recession at the time-- little did we know, right-- unemployment benefits accounted for 1% of income in the US. At the moment, they are 6%, so absolutely critical.

And I would even take it a step further. Look across the economy. You're not going to get business investment, not for another year, anyway. You're not going to get exports contributing to growth.

And government has done what it can. So what that means is that households will be carrying GDP, not just in the third quarter, beginning of the recovery, but for the next two years. So we have to be certain that households have the ability to spend, not just on consumer goods, but also residential investment, housing.

BRIAN SOZZI: Chris, do you think this is a somewhat misleading report being driven predominately by higher net worth households, in part because the stock market has climbed pretty significantly and many of those households still have their jobs, and a report like this masks continued economic weakness among lower-income households?

CHRIS LOW: Well, look, there's no question about that. And we know that for several reasons. You don't necessarily see the evidence of that in the aggregate data. But what we do know is, for example, aid from the treasury reached high-income households first. It is reaching minority households last.

And I suspect that's got something to do with the fact that they're using 2019 tax records. But that-- that is a real problem. The other thing is that there are still dozens of states that are having trouble getting unemployment insurance to people.

So those households that definitely have income right now are people who can work from home during the lockdown. And that tends to be upper-income individuals. We see evidence of that in average hourly earnings, which boomed in April and May, not because anybody got a raise, but because the lowest earners fell out of the job market.

ALEXIS CHRISTOFOROUS: What do you make of auto sales, Chris? I mean, in May, we saw a record jump in auto sales, people running out to get cars, even though many of them couldn't test drive them ahead of time because of the lockdown and the pandemic. Sales of autos high last month, but not as high the previous month. What do you think is driving things there?

CHRIS LOW: Well, I think it's a combination of factors. For one thing, people have money to put that down payment down, because you have had this huge surge in government aid the last couple of months. I think that's part of it.

Part of it is safety. Here in New York, if you drove a month and a half ago, the roads were empty. They are busier now than they have ever been, and that's because people are avoiding mass transit.

They've read the stories. They know what happened. My understanding is that the trains are safe now, but nobody wants to take that chance. So as companies are starting to reopen, people are returning to work, they're driving in.

BRIAN SOZZI: Chris, 30 seconds before I let you go. Non-store retail sales up almost 24% in the month. Is that all Amazon?

CHRIS LOW: It's-- it's mostly Amazon. And the year-on-year gain is even bigger than the monthly gain. I don't think they're going to lose that. You know, one of the huge things that happened during this lockdown is the few people who haven't yet tried shopping online, they have now. And they like it, and they're not going back.