Retail Made a Comeback in May, But Its Future Is Far From Clear

Nearing the halfway mark this year, U.S. retail and food service sales have not only recovered, but are well above their 2019 levels, according to data provided by the U.S. Census Bureau. As of the end of May, advance monthly retail and food service sales for the first five months of 2021 totaled an estimated $3 trillion on a seasonally adjusted basis, compared to approximately $2.5 trillion for the same period in 2019. That marks an increase of about 18.5%. (Note this figure includes not only retail and food service, but also categories such as autos and fuel.) For a similar period in 2020, during which retail results were depressed due to the pandemic, sales totaled about $2.4 trillion, with year-over-year growth currently standing at nearly 24%. Apparel in particular is showing signs of life. The sector took one of the biggest hits and accounted for most of the retail bankruptcies in 2020, but is now growing compared to 2019. For the first five months of 2021, clothing and clothing stores generated estimated sales of about $116 billion, marking growth of almost 71%. That's compared to nearly $68 billion at this point in 2020. It's also an increase of about 5% compared to roughly $111 billion for a similar period in 2019. Back in the saddle again In May 2021, retail sales remained elevated as the U.S. economy began to reopen, clocking in at about $620 billion. That's a slight decrease of 1.3% compared to April's nearly $629 billion, but an increase of approximately 28% versus May 2020's total of $484 billion. Matthew Shay, CEO of the National Retail Federation (NRF), said in a statement that while May retail sales "were down slightly, largely due to supply chain constraints, the more accurate indicator remains in the year-over-year-data," which showed a growth of over 17%, according to the NRF. He added that retail sales (which excludes categories like food service) for the first five months of 2021 are "already tracking 17.6% above the same five months of 2020, giving us further confidence in our newly revised sales forecast of growth between 10.5% and 13.5% to more than $4.44 trillion for 2021." While there are risks related to labor shortages, supply chain bottlenecks, tax increases and over-regulation, households overall are financially healthier, and consumers are demonstrating their willingness to spend, Shay said. "Retail sales as calculated by NRF were the second highest on record in May, topped only by holiday spending in December," noted Jack Kleinhenz, the NRF's chief economist, in the statement. "Demand has continued to be strong even as the concentrated impact from government stimulus has faded." Not declaring victory quite yet Despite the year-over-year increases, however, retail analysts at the major credit rating agencies say it may be too soon to declare complete victory. "We need to recognize we’re moving in a good direction," said David Silverman, a retail analyst at Fitch—but the sector remains "fluid and volatile," he noted. Silverman attributed some of the sales boost to both pent-up demand and the stimulus, the latter of which he believes is still driving retail volume. "While the numbers overall are encouraging, we're still in wait-and-see mode," he said. Silverman added, however, that there is a reason to expect the positive trend in apparel and cosmetics sales to continue, since consumers are continuing to return to offices this fall. But as the year proceeds, he said it would not be surprising to see declines in categories such as home improvement and grocery, given they had banner years last year. How the Boost in Home Improvement Might Benefit the Packaged-Food Industry This is not the new normal "The numbers we’ve been looking at the last couple of months have just been extremely hot and much better than expected," said Mickey Chadha, a senior retail analyst at Moody's. "This is not the new normal," he said, explaining what retail is currently experiencing is moving out of the pandemic phase and into a post-pandemic phase of pent-up demand. The apparel and department store categories, for example, continue to face what Chadha described as systemic challenges that existed before the pandemic and which remain largely unaddressed. He went on to characterize the 2020 and 2021 gains in categories such as grocery and home improvement as unsustainable going forward. In fact, during the second half of the year, Chadha expects spending to shift from these categories to services like travel, restaurants, events and movies. The good news is retail sales overall this year will still be above last year, which in turn was an increase over 2019 levels, he said. Lingering questions remain But some aspects remain to be seen, such as how the switch in spending from products to experiences will impact other categories and how quickly that shift will take place, posited Sarah Wyeth, lead retail analyst at S&P. There are plenty of factors Wyeth is tracking, such as the immediate impact of the stimulus and pent-up demand on retail sales, the migration of consumers from cities to the suburbs and the emergence of a new way of working. Given these many moving parts, and depending on how they reverberate through the retail landscape, she believes the shift from products to services will likely be gradual. "We're going to normalize over the next several years," Wyeth said. Revenge Spending Will Drive Consumer Trends This Year