U.S. retail sales posted a surprise increase in June as the economy continued to recover from the COVID-19 pandemic and consumers spent more on dining out and electronics.

Retail and food services sales increased 0.6% in June compared with May, which saw a revised drop of 1.7%, according to U.S. Census Bureau data released July 16. Consumer prices also spiked in June, rising 5.4% year over year, the largest increase since August 2008.

Government stimulus is most likely helping to boost consumer spending, but raises questions about the second half of 2021 once the stimulus ends, according to experts.

"When you look at the [retail sales] number, it's really good and says consumers are continuing to spend," said Joel Naroff, president of Naroff Economics. "What happens to consumer spending after the stimulus runs out?"

As previously reported, four companies filed for bankruptcy in late May and early June. There have been no other filings since then, according to S&P Global Market Intelligence data.

Retail sales

U.S. retail and food services sales increased to $621.34 billion in June, according to the U.S. Census Bureau. This is up from a revised $617.94 billion in May.

Consumers cut back on purchases related to furniture, autos, sporting equipment and building material, all of which were outperforming categories during the pandemic, according to Gregory Daco, chief U.S. economist at Oxford Economics. Instead, consumers spent more freely at restaurants and bars, electronic stores and gas stations.

Retailers still face product shortages and supply-chain constraints, as illustrated by the drop in monthly auto sales, according to National Retail Federation President and CEO Matthew Shay.

The retail group expects record sales in electronics, shoes and backpacks, however, as families get ready for in-person school this fall, Shay said in a news release.

As more people in the U.S. get vaccinated and start doing more outside the home, some of the spending growth will shift to services instead of retail, NRF Chief Economist Jack Kleinhenz said in the release. However, there should be enough spending momentum to support both services and retail, he added.

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Month-to-month volatility is expected as consumers shift to service-based spending, according to Lauren Henderson, economic analyst at Stifel Financial Corp.

"Furthermore, with federal support set to expire in the coming months, job and income growth will become the primary supports to activity, which will likely result in a somewhat uneven, albeit positive, rate of consumption towards year-end and into 2020," Henderson said in an email.

On the consumer side, the retail sales report was good, according to Naroff of Naroff Economics. The numbers show that consumers are enthusiastic about shopping at stores, but there is still uncertainty over how sustainable the spending is and at what pace it will continue, Naroff said.

"If [consumer spending] does slow down, as any economist would always tell you, there's good things and bad things about it," Naroff said in an interview.

Demand for goods is exceeding supply right now, which puts pressure on prices, Naroff said. If demand decreases, pressure on prices will fade and inflationary concerns will ease, but economic growth will slow.

Consumer prices

Inflation continues to rise. Consumer prices jumped 0.9% in June after increasing 0.6% in May, according to data from the U.S. Bureau of Labor Statistics. On a year-on-year basis, prices jumped 5.4% before seasonal adjustment.

Prices for used cars and trucks rose 10.5% month over month in June and 45.2% on an annual basis. Apparel prices rose 0.7% from May and 4.9% from June 2020.

Bankruptcy

No U.S. retailers filed for bankruptcy between late June and early July after four filings during late May to early June. Corporate bankruptcies are slowing in 2021 so far as government support and easy access to new cash are keeping many from turning to courts.

Even if bankruptcy filings remain slow throughout 2021, they could pick up later this year, according to Joseph Malfitano, founder and managing member of Malfitano Partners. There could be an increased need for courts if capital markets start to tighten up, Malfitano said.

"We are expecting some significant fallout post-Christmas in the retail space in particular," Malfitano said in an email.

Employment

The retail sector had 15.3 million jobs in June, up from 15.2 million in May, according to Bureau of Labor Statistics data.

Jobs at clothing stores were up 2.8% in June from May, while jobs at motor vehicle and parts dealers were up 0.5%.

Vulnerability

An analysis of the one-year probability of default scores identified 15 public retailers with scores ranging from 37.8% to 10.7% and corresponding implied credit scores of "ccc-" to "ccc+." The probability of default scores represent the odds that each company will default on its debt in a year, based on financial reports and accounting for different macroeconomic factors.

Health supplements retailer Merion Inc. topped the list with a probability of default score of 37.8%. The company did not respond to a request for comment.