WASHINGTON, Aug 15 (Reuters) - U.S. retail sales demonstrated a robust increase in July, primarily driven by heightened demand for motor vehicles alongside promotional efforts by major retailers such as Amazon.com and Walmart. However, a softening labor market and rising prices for goods may hinder consumer spending growth in the upcoming third quarter. The positive sales data from last month, coupled with an upward revision to June's figures, alleviated concerns about a potential stall in economic activity, which had been exacerbated by weak employment growth over the past three months.
The latest report from the Commerce Department, along with a survey from the University of Michigan indicating an increase in consumers' inflation expectations for August, further diminished the likelihood of a significant interest rate cut by the Federal Reserve in the near future. U.S. Treasury Secretary Scott Bessent noted that a half-percentage-point rate cut could be feasible due to the lackluster employment figures. Nevertheless, some economists expressed skepticism about the Fed resuming its policy easing cycle in September, especially with inflationary pressures seemingly on the rise as businesses shift higher import costs to consumers.
Retail sales climbed by 0.5% in July, following an upwardly revised 0.9% gain in June, as reported by the Census Bureau. Economists surveyed by Reuters had predicted a 0.5% increase in retail sales, which primarily reflect goods and are not adjusted for inflation. Year-over-year, sales surged by 3.9%. Notably, motor vehicle sales were a significant contributor, with receipts at auto dealerships rising by 1.6%, building on a 1.4% increase in June. Analysts at J.P. Morgan attributed part of this surge to a rush for battery-powered electric vehicles ahead of the expiration of federal tax credits on September 30.
Sales at clothing stores increased by 0.7%, while receipts at furniture outlets saw a notable jump of 1.4%. Additionally, sales in the sporting goods, hobby, musical instrument, and book store sectors rebounded by 0.8%. However, sales at building materials and garden equipment retailers dropped by 1.0%, and electronics and appliance stores experienced a decline of 0.6%. Spending at restaurants and bars also decreased, with sales at food services and drinking establishments falling by 0.4% after a 0.6% rise in June. Economists often view dining out as a critical indicator of household financial health.
Financial markets are currently anticipating a rate cut during the Federal Reserve's meeting on September 16-17. The central bank maintained its benchmark overnight interest rate within the 4.25%-4.50% range last month, marking the fifth consecutive hold since December. Meanwhile, Wall Street stocks traded mostly lower, the dollar declined against a basket of currencies, and U.S. Treasury yields increased.
Retail sales, excluding automobiles, gasoline, building materials, and food services, rose by 0.5% after an upwardly revised 0.8% increase in June. These so-called core retail sales, which closely align with the consumer spending component of gross domestic product, were previously reported to have gained 0.5% in June. When adjusted for inflation, economists estimated that core retail sales increased by 0.3% in July, indicating a solid start to the third quarter. However, concerns regarding consumer spending are growing amid a softening labor market and rising prices for goods and services.
The University of Michigan's Surveys of Consumers revealed a decline in consumer sentiment in August, with the measure of buying conditions for durable goods hitting a one-year low, reflecting deepening concerns about purchasing power. Lydia Boussour, a senior economist at EY-Parthenon, stated, "Underlying fundamentals are clearly softening." As we move forward, the drag on consumer demand is expected to intensify, particularly due to higher tariffs, which could lead consumers to reduce discretionary spending to manage rising costs.
Consumer inflation expectations increased to 4.9% this month, up from 4.5% in July, with this rise occurring across all political affiliations. This sentiment was reinforced by a report from the Labor Department's Bureau of Labor Statistics, which noted a 0.4% increase in import prices in July, largely driven by a rise in consumer goods costs. This followed a 0.1% decline in June. Import prices exclude tariffs, and the increase suggests that exporting nations are not reducing prices to mitigate the impact of higher costs on U.S. companies and consumers, contradicting predictions made by some officials in the Trump administration.
As noted by Carl Weinberg, chief economist at High Frequency Economics, the anticipated price drops resulting from tariffs have not materialized, leading to constraints in manufacturing activity. A report from the Federal Reserve indicated that factory output stalled in July, with expectations of this trend continuing in the coming months. The risks are skewed toward a more pronounced weakening, according to Veronica Clark, an economist at Citigroup. Factors such as tariffs, supply chain disruptions, and shipping delays are expected to weigh heavily on activity throughout the manufacturing sector, although some segments may benefit from the tariff measures.
