Washington
CNN
—
The backbone of the American economy remains solid despite a weakening labor market, higher interest rates and still high inflation.
US retail sales rose unexpectedly sharply in July, the Commerce Department said on Thursday. They rose a solid 1 percent month-on-month, after a decline in June had been revised downward to 0.2 percent. This significantly exceeded economists’ expectations of a 0.3 percent increase.
Retail sales, which take seasonal fluctuations into account but do not account for inflation, make up a significant portion of total spending. July’s figure is a boon for the U.S. economy, as the country’s economic growth depends on Americans spending their money.
It is the latest demonstration of the economy’s strength in the face of numerous economic hurdles weighing on the U.S. consumer.
The Dow rose 408 points, or 1%, as investors welcomed the retail sales report. The S&P 500 gained 1.1% and the Nasdaq Composite gained 1.6%.
Sales rose sharply in most categories last month, but most sharply at auto dealerships, likely reflecting a recovery from the cyberattack on the software systems dealers use earlier this summer. Those sales rose 3.6% in July. Excluding that category, retail sales still rose a strong 0.4% in July over June.
Retail sales for electronics and grocery stores also rose sharply last month, up 1.6 percent and 1 percent, respectively. Americans also continued to spend at a healthy pace at bars and restaurants. Meanwhile, sales at specialty stores and clothing retailers declined in July.
“The economy remains on an encouraging glide path toward a more normal state and a soft landing,” Oren Klachkin, financial markets economist at Nationwide, told CNN.
The Federal Reserve has kept interest rates at a 23-year high for a year to stem price pressures in the economy. Since launching a historic rate-hiking campaign in early 2022, the central bank has made some significant progress: The consumer price index fell below 3% in July for the first time in more than three years, according to data released Wednesday, well below the four-decade peak of 9.1% in June 2022.
But the Fed’s bitter medicine to fight inflation has also put pressure on the economy. That’s exactly how the Fed fights inflation – by dampening demand, which in turn slows the overall economy. With that comes the risk of recession, and that likelihood increases if the Fed keeps interest rates too high for too long.
So far, the U.S. economy has proven remarkably resilient in the Fed’s fight against inflation, but some cracks have also appeared. The biggest, most worrying question mark right now is the future of the labor market, a key driver of the economy. Unemployment recently jumped to its highest level since October 2021 after more than two years of being below the ultra-low rate of 4%. Economists tell CNN that once unemployment starts to rise, it tends to gain momentum and keep rising.
Many major retailers continue to say that American shoppers, including some with high incomes, are spending their money more cautiously these days. That’s been a big theme this earnings season and has Wall Street watching closely for further signs that U.S. consumption is slowing. Shares in the consumer discretionary sector in the S&P 500 are down 1.7% this year, making them the only sector currently trading in the red.
Home Depot reported this week that sales at stores open at least a year fell 3.6 percent last quarter. The company expects the sales decline to continue this year, falling 3 to 4 percent from last year.
“During the quarter, higher interest rates and greater macroeconomic uncertainty put pressure on overall consumer demand, resulting in lower spending on home improvement projects,” Home Depot CEO Ted Decker said in a statement.
Even buyers in higher price ranges have to tighten their (expensive) belts. The parent company of luxury brands Louis Vuitton, Dior and Fendi reported at the end of last month that sales in the last quarter had only increased by 1 percent compared to the same period last year. Both sales and profits had fallen in the first half of the fiscal year.
But it’s not all doom and gloom for U.S. companies. Walmart, America’s largest retailer, reported Thursday that sales at its U.S. stores rose 4.2 percent in the latest quarter and operating profits rose 8.5 percent in the same period. Online sales rose 22 percent, sending the company’s shares up 7 percent in premarket trading Thursday.
“The only places anyone is shopping right now are Amazon, Walmart and Costco,” Michael Baker, an analyst at DA Davidson, previously told CNN. “Walmart is doing a great job of focusing on value. Value has become more important. Structurally, they are well positioned.”
Thursday’s retail spending report does nothing to change the likelihood that the Fed will cut rates next month. Inflation has continued to move steadily toward the central bank’s 2% target and the labor market has weakened significantly, the two main reasons the Fed is on track to cut borrowing costs.
But it may have reduced the Fed’s chances of making a bigger-than-expected rate cut in September. Fed officials have said the economy’s continued strength has allowed them to wait and gather more evidence that inflation is truly under control. If the economy could get into serious trouble, that would force the Fed to consider more aggressive action. But that doesn’t seem to be the case, as American consumers are still fueling the economy with their spending.
Recent comments from central bankers do not suggest that the Fed is planning a massive rate cut. Some central bankers are still concerned that inflation may not yet be under control.
“We want to be absolutely sure,” Raphael Bostic, president of the Atlanta Fed, who will vote on monetary policy moves this year, said Tuesday during a conference in Atlanta. “It would be really bad if we started cutting interest rates and then had to raise them again.”
The probability of a quarter-percentage-point cut next month rose to 75 percent after the release of the government’s latest retail sales report, according to the CME FedWatch tool, up from 60 percent early Thursday morning. That also means the probability of a half-percentage-point cut has dropped significantly as traders recalibrate their expectations.
