Unfavorable inflation data in recent months and elevated interest rates led to slower-than-anticipated retail sales growth in the month of May. Retail sales increased by 0.1% but fell short of the anticipated 0.3%, which experts had projected, according to Yahoo Finance.

Following a 0.2% decline in April, retail sales data remained disappointing. According to Oxford Economics deputy chief U.S. economist Michael Pearce, as quoted on Yahoo Finance, moderating real income growth and credit-constrained consumers, thanks to elevated interest rates and rising credit card usage, are resulting in a slowing down of consumer spending.

Assessing Fed's Next Move

The pattern of retail sales and consumer spending can decide the Fed’s future plans. Since consumer spending accounts for about two-thirds of all economic activity, any weakness would indicate both a slowdown in growth and a push for the Fed to start cutting interest rates.

Currently, market indicators suggest two interest rate cuts this year, each amounting to a quarter percentage point. Recent encouraging inflation data has ignited market expectations of interest rate cuts this year, with a likelihood of 60.3% that the Fed might lower the rate to 5-5.25% in September, according to the CME FedWatch tool.

With increasing expectations of interest rate cuts toward the end of the year, consumer spending and the retail market may get some relief by the end of 2024.

Consumer Sentiment Remains Down

According to Reuters, consumer sentiment in the United States declined as households expressed concerns over inflation and income levels. The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 65.6 for June, down from May's final reading of 69.1.

This could impose additional constraints on the retail market and force consumers to curb discretionary spending, shifting focus to essential purchases. Rising debt levels and repayment obligations also contribute to reduced discretionary spending.

Exploring ETFs

Given the uncertainty over interest rates, which heavily depends on future inflation and economic data, investors remain skeptical about the performance of the retail market and consumer spending. Consumer spending may face additional challenges, given greater dependence on credit cards, while banks simultaneously tighten access to credit.

Below, we have highlighted a few ETF areas that investors may consider in light of soft retail sales.

Winning Areas

Consumer Staples ETFs

The space is non-cyclical in nature and may stand out during times of weak consumer spending.

Consumer Staples Select Sector SPDR Fund (XLP Quick QuoteXLP - Free Report) has gained 4.54% over the past three months.

Vanguard Consumer Staples ETF (VDC Quick QuoteVDC - Free Report) has gained 4.24% over the past three months.

iShares U.S. Consumer Staples ETF (IYK Quick QuoteIYK - Free Report) has gained 3.07% over the past three months.

Losing Area

Consumer Discretionary ETFs

Discretionary stocks are cyclical in nature and may underperform during weaker economic activities.

Consumer Discretionary Select Sector SPDR Fund (XLY Quick QuoteXLY - Free Report) has lost 4.47% over the past three months.

Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report) has lost 3.47% over the past three months.

First Trust Consumer Discretionary AlphaDEX Fund (FXD Quick QuoteFXD - Free Report) has lost 1.13% over the past three months.

Food & Beverage ETF

Per Reuters, sales at food services and drinking places declined by 0.4%, marking the largest drop since January. Considered as a crucial indicator of household finances, sales at food services and drinking places have declined in three of the past five months.

Invesco Food & Beverage ETF (PBJ Quick QuotePBJ - Free Report) has lost 4.6% over the past three months.

First Trust Nasdaq Food & Beverage ETF (FTXG Quick QuoteFTXG - Free Report) has lost 3.6% over the past three months.