Retail sales slumped in May as consumers dealt with rising inflation, but the Federal Reserve today made a move to fight to tackle high prices by raising interest rates. Will it be enough, and when could it potentially shift consumer behavior? Meanwhile, retailers like Target are slashing prices on non-essential goods due to an excess of inventory, and the bargains could potentially give shoppers a break. Jharonne Martis, director of consumer research at Refinitiv, joins Closing Bell to discuss consumer and retailer behavior, how the Fed's rate hike could provide relief and when, and more.

Closing Bell

May Retail Sales Slump As Consumers Deal with Inflation — Which Fed Tries to Tackle by Raising Rates

Welcome back to closing bell on cheddar news everyone, I'm kristen Schouler down here on the floor of the stock exchange and may retail sales data that report showing a surprising drop with sales declining by 3/10 of a percent last month, Consumers pulling back as inflation surges, which is the big problem that the Fed is trying to tackle by today, raising interest rates by 75 basis points in the biggest rate rise since 1990 for well, not surprisingly, sales at gas stations increasing as gas prices hit new records and so did sales at restaurants and bars as people focus on services over goods. So Fed chair jerome Powell also saying today that the central bank is watching consumer behavior very closely and joining me now is Jerome Martis, director of consumer research at Refinitiv from that provides financial market data, jeroen. I know you always watch consumer data very closely and because of that, what is your read on the state of the american consumer? So the main retail sales results definitely show that consumers are pulling away from some of those pandemic things that we saw, right? So online 1% opening up up there while it's a little bit more to go out and eat at restaurants. So they're choosing experiences over things and even the things like discretionary items like clothing, we're not, we're pretty much flat. So we're saying that consumer is not only trying to not spend as much because of the inflation um there, but they're also trying to switch their behavior where they spend money and feel better about actually eating out. So it goes more and more in line with the reopening. So this 3/10 of a percentage point drop actually a month over month, read in May versus april, but on a year of a year basis, we did see um that spending actually rise about 8.1% if we want to pull up that full screen yet again. So jeroen as you and I have been speaking Fed chair jerome Powell continuing his press conference after the Fed did decide to act more aggressively to raise interest rates. But Fed Chair Powell, noting that consumers are spending and there's no sign of a broader slowdown in the economy, actually seemingly pretty optimistic currently about the economy in the Fed's decision. Are you seeing a shift at all? Of course, we're seeing a shift as you mentioned in what consumers are actually buying. But are you seeing any indication that inflation and spending might be peaking? So it's interesting because at the beginning of the year, we saw that consumers actually because they're feeling better about the reopening, they purchased a lot of tickets to go travel in the second quarter. And even airlines told us that they booked many flights. So when we look at the Q one earnings data for retailers that dropped 17%,, It's expected to improve somewhat in the second quarter to a negative 6.1%, but all of that strength is really being driven by travel, hotels and entertainment, which goes hand in hand with the data that we've got seen around credit card. Um So when consumers have been using their credit card this year, when they've been feeling good about taking on that, it's been in the experiences um sector. So what we're expected to see is that consumers are gonna be holding back on discretionary items in the second quarter, they are gonna fulfill those trips that they booked earlier in the year and then because they are, they already know that inflation is in the air and they have to pay higher prices in the meantime holding back on this question eri spending because they are planning to do those trips in the second quarter now in the third quarter, towards the end of the second quarter in the third quarter, that's why we're gonna seek spending picked up a little bit more because we entered the back to school season and our research refinitiv shows that no matter how the economy is doing, that's what happens every year and parents are budgeted for it interesting. Okay, that's very noteworthy there about Gerona, how important is the consumer to overall GDP growth, There is the concern that we might head into a recession, but the consumer might be able to save it. So the, despite the high grades, that takes a little bit of time for it to really get a reaction from from the consumer and the markets. Um But the one economic indicator that has a very strong relation with spending is the employment data. So when we look at our refinitiv consumer confidence data, it's very clear that the consumer is very concerned about inflation, is concerned about the future of the economy, but the one index, the job index is the one indicator that is consistently positive as the inflation has been going up and as consumers still feel negative about the economy. So this is telling us that the reason why consumers have been spending freely is because they feel secure about their job. But if the unemployment number starts to come up, that's when we're going to start seeing consumers hold back on spending even more so than the inflation or interest or heights and and or or any other economic indicators. So it really comes down to how fast we see a change in the employment data that will um that will push the consumer on either end. So if the unemployment data stays where it's at or even if it declines a little bit consumer spending, will the consumers will remain engaged with spending. But if we see the unemployment number really start to rise and consumers start seeing their friends and family lose their jobs, that's when we have trouble of getting into a recession because consumers will put their hands in their pack in their pockets and hold back on spending. Well, certainly as we keep a close eye on this economy, jerome, do you think that there are certain retailers that might be able to better weather at the store, whose goods and services are in demand even amid a tight economy. So for sure the dollar starts are benefiting from the low end consumer who is already tied on money. The middle class consumer, they're just looking for values so they've cut off their netflix subscriptions because those prices have gone up, but simultaneously, instead they've been getting memberships at at the discount club houses like stands B. J. Wholesales and even Costco because they want to save money at the pump, so they're just looking for value. Meanwhile, the high end consumer um luxury retailers have been able to actually pass on those higher prices onto the high end consumer who's been able and still willing to be engaged and are spending freely. And this is very evident on two matters, lululemon earlier this year did announce price increases. And despite these price increases, consumers are still paying full price for the new merchandise. You look at the high end luxury names from europe like Hermes and not only are they expected to post stronger earnings from a year ago, but even stronger than the pandemic because they are able to pass on those higher prices to the consumer was willing and able and it's still fully engaged. Yeah, I think people still apt to get out right out of two years after two years of lockdown and willing to spend on those higher priced goods if they have the money. Drew Martos, director of consumer research at Refinitiv. We got to leave it there, jerome. Thank you so much.