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On Tuesday, the Commerce Department said retail sales in May fell less than expected. If you look behind the numbers, however, the new retail data clearly shows a deceleration in consumption.

Headline retail sales declined 0.2% last month, better than the 0.5% decline predicted by economists. If you strip out the impact of autos and gas, retail sales rose 0.3%, higher than analysts’ expectation of a 0.2% rise.

Still, when you look at another variation of the data, the month-over-month change for retail spending less food and autos, slowing consumption growth is very evident. By this measure, retail sales were up 0.3% from April, the slowest rate of growth since last July.

While the consumer is not falling off a cliff, the recent slowdown in consumption is the expected consumer response to a still soft housing market, rising gasoline prices, a weak labor market and less federal stimulus.

As consumers struggle with these headwinds, we continue to expect weak — soft, but not awful — growth in the second quarter of this year and arguably the third quarter as well. We also believe that the consumer is not done deleveraging and that this will further contribute to soft consumer spending for the remainder of the year.

What does this mean for investors? In addition to confirming our growth expectations for the next couple quarters, the latest retail figures also back up our underweight view of US retailers.

As we mentioned last week, consumption is likely to continue to slow with the economy, meaning the US consumer is the weak link for the US economy. US retailers, however, don’t appear to reflect this in their valuations. In light of this, we also would look towards segments of market such as technology and industrials that are levered to either corporate spending or growth outside of the US. Earlier this week, for instance, we advocated an overweight view of the global technology sector.

Potential iShares solutions

Underweight US Retailers IYK – iShares Dow Jones U.S. Consumer Goods Sector Index Fund (click here for fund details)
Overweight Global Technology IXN – iShares S&P Global Technology Sector Index Fund (click here for fund details)

In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Dow Jones Trademark Holdings, LLC, or Standard & Poor’s. Neither of these companies make any representation regarding the advisability of investing in the Funds. Neither SEI, nor BlackRock Institutional Trust Company, N.A., nor any of their affiliates, are affiliated with the companies listed above.

Source: Behind the Numbers: Retail Sales