Consumer spending rose in July, with retail sales rising 1%, much better than expected

In a strong display of consumer resilience, July retail sales beat expectations, rising 1%, the Commerce Department reported. The gain, which was adjusted for seasonal variations but not for inflation, beat the modest 0.3% increase forecast by economists polled by Dow Jones. The adjustment followed a downward revision to June’s figures, which showed a 0.2% decline from initially reported flat growth.

Excluding auto-related sales, retail data still showed a positive trend, rising 0.4%, again beating the 0.1% forecast.

The positive retail trade figures were complemented by encouraging developments in the employment sector. The week ended August 10 saw initial jobless claims fall to 227,000, down 7,000 from the previous week, and also below the 235,000 forecast.

Sector-specific gains were led by a 3.6% increase in motor vehicle and parts dealerships, with electronics and appliance stores also showing strong performance with a 1.6% increase. Food and beverage stores improved by 0.9%. However, not all sectors fared well; miscellaneous retailers declined by 2.5% and gas stations saw a negligible increase of 0.1%. Clothing stores also fell slightly by 0.1%.

Following the release of this data, stock market futures rallied significantly and Treasury yields rose, reflecting investor optimism.

This financial update coincided with other economic indicators that suggested inflation was slowing for July. Consumer prices rose just 0.2% for the month, bringing the annual inflation rate to 2.9%, the lowest since March 2021. Meanwhile, wholesale prices saw an even smaller monthly increase of 0.1% and an annual increase of 2.2%.

While these numbers are still above the Federal Reserve’s target rate of 2%, the trend points to a gradual easing of previously elevated inflationary pressures. This backdrop sets the stage for the Federal Reserve’s next meeting in September, where it is widely expected to cut interest rates for the first time in more than four years. However, strong consumer spending could prompt a more cautious approach to rate cuts.

Investors are also shifting their expectations, anticipating that the Fed may broaden its focus from tight-lipped inflation management to assessing potential weaknesses in the labor market and other economic sectors.

Further employment data revealed a slight decline in pending jobless claims to 1.864 million. This follows a weaker-than-expected July payrolls report, sparking concerns about a potential labor market cooling.

Manufacturing data was mixed. The New York Fed’s Empire State Manufacturing Index improved slightly, though it remained negative at -4.7, slightly better than the -6 forecast. In contrast, the Philadelphia Fed’s manufacturing index moved into negative territory for the first time since January, reading -7, significantly below the 7.9 forecast.

These figures provide a snapshot of an economy that is going through complex dynamics, suggesting cautious optimism in a context of fluctuating indicators.