Consumers enjoying a summer tailwind
But will the Iran conflict and the Fed take the wind out of their sails?
Bottom line
The combination of a hugely successful soccer tournament, the America250 celebration and an Amazon Prime week resulted in stronger-than-expected US retail sales in June. With a much-improved labor market this year and a continued wealth effect due to record high stock prices, many consumers have enjoyed a solid first half of 2026.
But as we look across the proverbial valley, the reignition of hostilities in the Middle East has fueled a 40% surge in crude oil (West Texas Intermediate, or WTI) prices from $67 on July 2 to $93 per barrel yesterday. The average US per gallon price of gasoline rose 8% to $4.10 per gallon today. Although inflation was lower than consensus projections in June, the Federal Reserve is concerned that rising energy costs will push it further upward. Rather than look through the crude supply shock and keeping rates unchanged all year, which we believe to be the right call, some policymakers are contemplating a rate hike, perhaps as early as at next week’s Federal Open Market Committee meeting or September’s. But that might slow consumer spending, impair economic growth and harm job creation. Investors will be on edge over the next few months watching how everything develops.
Solid ‘Marpril’ retail sales accelerated into May and June Defined as the combined results of March and April due to the annual calendar rotation of Easter and Passover, “Marpril” retail sales rose a solid 4.7% year-over-year (y/y) in 2026, compared with a slightly stronger 5.1% gain in 2025. We were prepared to offer consumers a mulligan for May retail sales to right-size budgets before Back-to-School (BTS) spending began in June. They did not need it. May sales surged 7.3% y/y and June followed with a 6.7% y/y gain.
In June, nominal retail sales rose for the fifth consecutive month by an in-line 0.2% month-over-month (m/m), compared with stronger upwardly revised gains of 1.0% m/m in May and 0.7% m/m in April. Control results — which exclude food services, gas stations, auto dealers and building materials, and which feed directly into quarterly GDP calculations — rose an in-line 0.5% m/m in June, while May and April rose by strong upwardly revised gains of 0.8% and 0.6% m/m, respectively.
‘Futbol’ a huge success The soccer tournament ran from June 11 to July 19, with 48 teams, 104 matches and an estimated two billion viewers worldwide. For the eleven US host cities, tourism was off the charts. Bank of America reports that overall sales, including restaurants, bars and retail stores, rose 5% y/y. Sales from tourists alone rose a strong 13% y/y, but that is a temporary bump that will not impact the rest of the BTS season.
Amazon Prime week in June this year Amazon shifted its annual Prime week to June 23-26 this year, pulling it forward from July. According to Adobe Analytics, Amazon generated a record $26.4 billion in retail sales over the four days, up an estimated 9.3% y/y from 2025. Competitors such as Walmart, Target and Best Buy, among others, held similar promotions during the same period, helping to collectively generate a strong start to the critical BTS season.
Solid labor market Nonfarm payrolls have risen an average of 137,000 jobs over the past four months through June, compared with less than 10,000 jobs per month during 2025, and the unemployment rate fell to a one-year low of 4.2%. Yesterday’s initial weekly jobless claims data was the survey week for the July nonfarm payroll report, to be flashed on Friday, August 7. At only 187,000, claims hit a 58-year low, which suggests that July payrolls should comfortably surpass June’s muted gain of only 57,000 jobs. Moreover, the unemployment rate for less educated workers plunged to a five-month low of 5.5% in June from 6.0% in May, while the unemployment rate for highly educated workers stayed at 2.7%.
Business and consumer confidence starting to improve:
- NFIB Small Business Optimism Index rose from a 19-month low of 95.3 in May 2026 to a four-month high of 97.4 in June.
- University of Michigan’s Consumer Sentiment Index leapt from a record low of 44.8 in May 2026 to a five-month high of 54.4 in July 2026.
- Conference Board’s Consumer Confidence Index increased from a nine-month low of 89.0 in January 2026 to a two-month high of 91.2 in June 2026.
Better inflation news in June, but is it sustainable? Inflation declined from 40-year highs in mid-2022 to five-year lows in January and February 2026. But the collateral damage from the Iran conflict sent inflation soaring during March, April and May. However, with the fragile ceasefire in June, energy prices and inflation declined sharply:
- Nominal CPI retail inflation plummeted to a five-year low of 2.4% y/y in February 2026, from a 40-year high of 9.1% y/y in June 2022, before leaping to a three-year high of 4.2% in May. Importantly, it rose by a much cooler-than-expected 3.5% in June 2026 (consensus at 3.8%).
- Core CPI declined to a more than five-year low of 2.5% y/y in February 2026, down from a 40-year high of 6.6% y/y in September 2022. It then rose to a seven-month high of 2.9% in May before easing to a much cooler-than-expected 2.6% in June (consensus at 2.8%).
Cooler inflation neutralizes net wage growth June’s average hourly earnings grew at a solid 3.5% y/y, up from a 3.4% gain in May. But with the cooler nominal inflation of 3.5% y/y in June, the relationship between inflation and wage growth is now on par rather than underwater. Importantly, when we consider core inflation — which excludes volatile food and energy prices — wage growth is now solidly in positive territory, providing some additional dry powder for consumers.
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