'Might be where consumers start to pull back if their budgets are constrained': Simons on dining out

Key Concepts

• Nominal Retail Sales: Sales figures measured at current prices without adjusting for inflation.
• K-Shaped Economy: An economic scenario where different sectors or income groups recover or grow at vastly different rates.
• Discretionary Spending: Non-essential spending on goods and services (e.g., dining out, sporting goods).
• Restrictive Interest Rates: Monetary policy where interest rates are high enough to slow down economic growth and curb inflation.
• Seasonal Pattern Shift: Anomalies in consumer behavior where spending cycles deviate from historical norms (e.g., Q4 2025 softness vs. Q3 strength).

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1. Analysis of April Retail Sales

US retail sales experienced a 0.5% increase in April, marking the third consecutive month of growth. Thomas Simons, Chief US Economist at Jefferies, notes that this data is significant because it shows no evidence of a slowdown in discretionary spending, despite the inflationary pressure caused by rising gasoline prices.

• Key Sectors: Growth was observed in eating and drinking establishments, non-store retailers (online shopping), and building materials, indicating that consumers remain active in home improvement and lifestyle spending.
• Sporting Goods: This sector showed unexpected strength. Simons attributes this to a potential "replacement cycle" where pandemic-era equipment is wearing out, or a shift in consumer behavior toward alternative transportation (e.g., bicycles) to mitigate high fuel costs.

2. The Impact of Gasoline Prices

Simons argues that while gasoline prices are rising, they have not yet reached a "squeezy point" that would force a broad-based consumer pullback.

• Comparative Context: He notes that current inflation-adjusted gasoline prices are nowhere near the levels seen in 2008, which would be equivalent to $8–$10 per gallon today.
• Uneven Burden: The impact is felt disproportionately. Lower-income households are struggling, but the "K-shaped" nature of the economy means that upper-income consumers—who drive the bulk of top-line growth—are largely unaffected by current fuel price levels.

3. Consumer Behavior and Inflationary Pressures

• Dining Out: Despite rising costs, dining out remains a resilient form of "affordable entertainment." Simons observes that even during economic downturns, consumers rarely cut entertainment spending to zero, as it serves as a psychological necessity.
• Food Inflation: While food prices have been "choppy," Simons anticipates future increases. Because food distribution relies on trucking (diesel fuel), rising energy costs will eventually translate into higher shelf prices. Currently, there is no significant evidence of consumers trading down from dining out to eating at home.

4. Economic Outlook and Monetary Policy

Simons provided an update on the economic trajectory and the Federal Reserve’s potential path under the "Kevin Warsh era."

• Labor Market Strength: The labor market has shown significant improvement in 2026, with job gains averaging 75,000 per month, a substantial increase from the 10,000 per month average in 2025.
• Interest Rate Projections: Due to the robust labor market and persistent inflation, the case for immediate interest rate cuts has weakened. Simons suggests that while rate cuts might occur in the second half of the year, they are contingent on the labor market cooling and the resolution of the conflict in Iran. He posits that rate adjustments might realistically be pushed to 2027 if current trends hold.

5. Synthesis and Conclusion

The US consumer remains remarkably resilient, with retail sales growth persisting despite energy-related inflationary pressures. While the economy is experiencing a "K-shaped" divergence where lower-income households face genuine hardship, the overall spending momentum is supported by upper-income resilience and a strengthening labor market. The primary risks to this outlook are the duration of the conflict in Iran and the potential for sustained high energy costs to eventually force a shift in consumer behavior. Consequently, the Federal Reserve is likely to maintain a cautious stance on interest rates, prioritizing labor market data and inflation trends over immediate monetary easing.