The forecast: US retail sales will grow 2.9% year-over-year (YoY) this year to $7.303 billion, per our US Total Retail Sales forecast. We expect growth to accelerate to 3.5% next year.

• That modest growth reflects a complicated post-pandemic environment in which the labor market remains strong, but consumer spending patterns have shifted from goods to services and inflation continues to weigh on consumers.

The metrics: It can be hard to make sense out of the mixed signals coming from US government agencies and other sources.

• Consumers have money to spend. The tight labor market pushed up personal income 0.4% month-over-month (MoM), according to a US Commerce Department report, while another recent report noted that workers’ buying power increased for the first time in two years in May.
• They’re feeling increasingly optimistic. US consumer confidence reached its highest point in 18 months in June, according to the Confidence Board, and the University of Michigan’s measure found a consensus improvement across all demographic groups.
• But they’re losing steam—and focused on saving. Consumer spending in May was flat when adjusted for inflation and growth has essentially stalled since rising 1.3% MoM in January, per the Commerce Department. Consumers also continue to rebalance what they’re buying as spending on goods fell 0.4%, while services rose 0.2%. Meanwhile, the personal saving rate ticked up to 4.6% in May.
• There are speed bumps ahead. While inflation is waning, it remains elevated, which has caused nearly 80% of consumers to cut spending on nonessential goods like home decor and clothing over the past six months, according to a CNBC and Morning Consult survey. And consumers’ price sensitivities are poised to grow more pronounced as the student loan payment pause expires at the end of August.

On the ground: A wide array of retailers, including Home Depot, Target, and Macy’s, recently noted that consumers have grown increasingly price sensitive this year.

• Casey’s General Stores CEO Darrenn Rebelez said the gas station and convenience store chain has seen low-income consumers opt for less expensive prepackaged foods and private label goods rather than hot breakfast items or name-brand products. Some are also stretching their dollars when they fill their tank by choosing cheaper ethanol blends.
• And 43% of merchants are ordering less inventory than last year as they prepare for a challenging holiday season.

The big takeaway: Retailers can and should prepare for a period of slower, incremental growth that’s roughly in line with historical norms.