US retail sales rise unexpectedly but inflation hampers spending

  • Retail sales up 0.3% in August
  • July data revised down to show sales down 0.4%
  • Core Retail Sales Flat; July sales revised down
  • Weekly jobless claims fall 5k to 213k
  • Manufacturing output rose 0.1% in August

WASHINGTON, Sept 15 (Reuters) – US retail sales unexpectedly rebounded in August as Americans increased car purchases and ate out more amid lower gas prices, but demand is cooling as the Federal Reserve aggressively hikes interest rates, to fight inflation.

However, consumer spending is likely to continue to be supported by continued strength in the job market, with other data on Thursday showing that the number of people filing new jobless claims last week fell to the lowest level in more than three months.

The data was among the latest reports to be released ahead of next Wednesday’s Fed meeting. Coupled with a surprise consumer price hike in August, Federal Reserve reports likely provide ammunition for a third straight 75 basis point rate hike.

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“Demand appears to be slowing this quarter, but job losses appear modest at this point in the business cycle,” said Christopher Rupkey, chief US economist at FWDBONDS in New York. “The recession storm clouds threatening the economy have moved further offshore and this will likely convince Fed officials to step on the brakes even more.”

Retail sales rose 0.3% last month, also helped by the back to school. However, data for July has been revised downwards to show retail sales fell 0.4%, rather than flat as previously reported. Economists polled by Reuters had forecast sales would remain flat, with estimates ranging from a fall of just 0.5% to a rise of 0.5%.

Retail sales, which are primarily commodities and are not adjusted for inflation, rose 9.1% yoy in August.

retail sales

Some economists were disappointed that monthly sales failed to make up for the July slump, even as consumers got some respite from higher gasoline prices. They said it was a sign that stubbornly high inflation was forcing some cuts in discretionary spending as consumers focused on essentials.

“While consumers generally remain willing to spend, many families, especially those on the low- to middle-end of the income spectrum, are feeling increasingly constrained by increased prices,” said Gregory Daco, chief economist at EY-Parthenon in New York.

Although inflation remains a headache, it is unlikely to solidify as a separate Labor Department report on Thursday shows that import prices fell for a second straight month in August, thanks to lower commodity prices and a strong dollar. Continue reading

Gasoline prices have fallen about 20% from their record high in June, according to data from the US Energy Information Administration. Gas station sales fell 4.2% last month, while car dealership revenues rose 2.8%.

Clothing and general store sales rose solidly, fueled by the back to school. Online and mail order retail sales, however, fell 0.7% after being boosted by Amazon’s Prime Day promotion the previous month.

Furniture stores’ revenues fell 1.3%, while building materials and garden equipment dealers’ sales increased 1.1%. Sales at electronics and appliance stores fell 0.1%. There was strong sales growth in the hobby, musical instrument and book trade. Revenue from bars and restaurants, the only service category in the retail sales report, rose 1.1%.

Wall Street stocks were lower. The dollar was stable against a basket of currencies. US Treasury bond prices fell.

TIGHT LABOR MARKET

Excluding autos, gasoline, building materials and food services, retail sales were flat last month. Data for July has been revised down to show that so-called core retail sales rose 0.4% instead of 0.8% as previously reported.

Core retail sales correspond most closely to the consumer spending component of gross domestic product. A steady pace of consumer spending and strong export growth helped limit the drag on the economy from a moderation in inventory building in the second quarter.

Economists estimated that inflation-adjusted core retail sales fell by at least 0.5% in August. This coupled with the downward revision in July likely kept real consumer spending on a moderate growth path. Economic growth estimates for the third quarter are mostly below an annualized rate of 2%.

The economy contracted 0.6% in the most recent quarter after contracting 1.6% in the January-March period. But it’s not in a recession as the income side of the growth book shows a 1.4% expansion rate in the second quarter thanks to the resilience of the job market.

A third Labor Department report showed that initial jobless claims fell by 5,000 to a seasonally adjusted 213,000 in the week ended September 10, the lowest since late May.

Reuters graphics

Despite hand-wringing over a possible recession next year due to higher borrowing costs, there was no surge in layoffs. Economists say companies are hoarding workers after struggling to hire over the past year as the COVID-19 pandemic forced some people off the job, in part because of prolonged illnesses caused by the virus.

At the end of July there were 11.2 million job vacancies, with two jobs for every unemployed person.

“We expect employers to slow the pace of hiring before making any major layoffs,” said Nancy Vanden Houten, senior US economist at Oxford Economics in New York.

While tighter monetary policy has not slowed the labor market significantly, manufacturing is beginning to feel the effects of the crisis. Factory output rose little in August, a fourth Fed report showed. Continue reading

Manufacturing struggles were compounded by a fifth report from the Philadelphia Fed showing factory activity in the mid-Atlantic region contracting in September. In upstate New York, manufacturing was steady this month but at weaker levels, a sixth report from the New York Fed showed.

Empire State and Philly Fed

“Supply chain constraints and pricing pressures seem to be easing, which is positive for manufacturing,” said Rubeela Farooqi, chief US economist at High Frequency Economics in White Plains, New York. “But factory activity is likely to weaken in response to slowing demand amid rising interest rates.”

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Reporting by Lucia Mutikani; Edited by Paul Simao and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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