Consumers spent freely on cars and building supplies in May, but a drop in
restaurant sales raised questions about whether this year's tax increases are
affecting consumers' confidence and crimping spending.
Overall, retail sales beat expectations, rising 0.6% in May, the Census Bureau reported Wednesday. Leading the charge: A 1.8% jump in sales of cars and parts, also up 8.5% from this time last year. Building materials and supplies gained 0.9%.
But the newest weak spot was a 0.4% drop at restaurants and bars, which had been among the biggest gainers in April, the bureau reported.
Economists watch restaurant sales for signs of how consumers handle discretionary income. When restaurant sales held up last year, that was seen as a sign that then-surging gasoline prices wouldn't slow the economy. Their strength in early 2013 was taken as evidence the impact of the tax hikes was smaller than expected. The latest news doesn't immediately change that, economists said.
"You can't draw conclusions based on one month," said Bernard Baumohl, chief global economist at the Economic Outlook Group. "Year-over-year, it's still up about 4%."
The industry has already been dealing with cash-strapped middle-income consumers, said Bryan Elliott, analyst at stock broker Raymond James. Personal income fell for families around the $50,000-a-year national median during the recession and hasn't recovered, he said.
"That segment has lost considerable purchasing power over the last few years, and lost more in January," when payroll taxes went up by 2 percentage points. "Restaurants are the first places consumers cut when they are tight for money." Restaurants are being managed to boost profits on sales growth of less than 5% a year, he said. A handful of fast-growing brands such as Panera and Chipotle have been exceptions, he said.
A small number of companies, including Red Lobster owner Darden Restaurants, blamed soft sales on the tax increase. Darden spokesman Rich Jeffers declined to comment.
The impact of higher taxes may show up in more demands for discounting and price promotion, said Robin Lee Allen, executive editor of trade journal Nation's Restaurant News. She pointed to a promotion by Subway for a $4 sandwich-and-soda lunch. McDonald's said June 11 that discounting drove its May gain.
Excluding autos, retail sales rose 0.3% in May, the Commerce Department reported. The overall retail sales number beat the 0.5% median forecast of 83 economists surveyed by Bloomberg News.
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