Dive Brief:

• Retail sales rose just 0.1% in May and were revised downward for the prior two months, the Commerce Department said Tuesday, spotlighting the strains on consumers from inflation, waning pandemic savings, a cooling labor market and borrowing costs persisting near a two-decade high.
• Sales of furniture and home furnishings, building materials, food and beverages, gasoline, and food services fell last month while total purchases for motor vehicles, electronics and six other categories increased, according to the Commerce Department.
• “We’re seeing some very good signs of supply and demand coming back into balance after kind of the extreme imbalances of the past couple of years,” John Williams, president of the Federal Reserve Bank of New York, said Tuesday in an interview with Fox Business.

Dive Insight:

Inflation and economic growth have not slowed in 2024 as quickly as economists anticipated, prompting Fed policymakers on June 12 to trim from three to one their median forecast for cuts to the main interest rate this year.

“Despite higher borrowing costs, economic activity has been remarkably resilient overall,” Boston Federal Reserve Bank President Susan Collins said Tuesday.

Central bank officials see the economy growing 2.1% this year and 2% in both 2025 and 2026, according to their median forecast.

Cooling the economy and restoring inflation to the Fed’s 2% target “may just take more time than previously thought,” Collins said in a speech. “The appropriate approach to monetary policy continues to require patience.”

Recent data has aligned more with the Fed’s goal of curbing growth without causing a recession. Construction and consumer spending in recent months have fallen short of estimates.

“April data, especially on real consumer spending and nominal retail sales, mostly underwhelmed, and the few May data reported to date have been mixed,” St. Louis Fed President Alberto Musalem said today.

“As reported this morning, May retail sales were weaker than expected, suggesting that aggregate demand is growing at a moderate pace thus far this quarter,” he said. “Inflation and higher interest rates are straining low- and moderate-income households and those with high levels of debt.”

Consumer sentiment, as measured by the University of Michigan, slumped this month to the lowest level since November.

“Assessments of personal finance dipped due to modestly rising concerns over high prices as well as weakening incomes,” Joanne Hsu, director of the university’s surveys of consumers, said Friday in a statement.

At the same time, hiring has remained robust, with employers adding 272,000 jobs in May. Unemployment, although edging up last month to 4% from 3.9% in April, has not exceeded 4% for 30 months.

Also, industrial production rose 0.9% last month — more than expected — after no change in April, the Fed said Tuesday. Manufacturing output also increased 0.9% in May after falling for two consecutive months.

The Atlanta Fed is confident in sustained economic growth, forecasting that gross domestic product will likely expand at a 3.1% annual rate during Q2, accelerating from an estimated 1.3% pace during Q1.

“We have a very strong economy,” Williams said. “I expect interest rates to come down gradually over the next couple of years, reflecting the fact that inflation is coming back to our 2% target and the economy is moving in a very strong sustainable path.”