Retail sales have biggest drop since September

Reuters gets to use its favorite adverb for reporting on bad economic news, although the AP isn’t far behind.  After seeing a short period of retail sales growth, sales fell in May by the largest amount in almost a year.  The decline was led by building materials and auto sales:

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Sales at retailers unexpectedly fell in May for the first time since September following a record slump in purchases of building materials, adding to fears the economic recovery was losing some steam.

The Commerce Department said total retail sales dropped 1.2 percent, the largest decline since September, after rising by an upwardly revised 0.6 percent in April. Sales in April were previously reported to have increased 0.4 percent.

Analysts polled by Reuters had forecast retail sales rising 0.2 percent last month.

The biggest hit came in building and garden materials, which fell 9.3% in May from April.  This appears tied to the expiration of the home buyer tax credit, as home sellers stopped preparing to put homes on the market.  That was not the only market that had problems, however.  Auto sales dropped 1.7%, and clothing and accessories fell 1.3%.  Gasoline sales fell 3.3%.

In response to this and a 40% drop in mortgage applications in May, Congress may extend the homebuyer credit deadline yet again, but it won’t actually address any new sales:

Home buyers hoping to take advantage of a lucrative federal tax credit would get three extra months to complete their purchases under a proposal introduced in the Senate on Thursday.

Senate Majority Leader Harry M. Reid (D-Nev.) co-authored a proposal that would allow those eligible for the tax credit to close on a home by Sept. 30 to give lenders more time to process a crush of applications. …

To qualify for the tax credit — $8,000 for some first-time buyers and $6,500 for certain current homeowners — buyers must have signed a contract by April 30 and close on the their transactions by June 30.

The National Association of Realtors said many home buyers will not be able to meet the June 30 closing deadline because of the surge in loan volume and delays related to home appraisals and short sales, transactions in which lenders allow struggling homeowners to sell their homes for less than they owe on them.

The association estimates that as many as 180,000 people who signed a contract by April 30 would not be able to meet the current closing deadline, said Lawrence Yun, the group’s chief economist. “Under normal market circumstances, most people would have been able to complete a deal in a two-month time span,” Yun said.

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This shows yet again the unintended consequences of government interventions.  The credit forced a change in market behavior that temporarily raised costs and inefficiencies in the processing of applications.  However, the problem is transitory enough that it doesn’t justify adding new jobs, at least not non-temporary jobs, in order to correct for the demand.  Furthermore, the credit simply steals sales from future demand (as we have seen in the 40% drop in mortgage applications since its expiration), which means that the lenders will eventually be overstaffed after the demand bubble bursts.  The net result will likely be slightly more joblessness, not less.

At least no one is demanding an extension of the credit itself for more kick-the-can economics.  Yet.  If Congress restrains itself from more phony stimulus in that vein, it would be most unexpected indeed.

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Ed Morrissey 7:00 PM | August 30, 2025
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