As Americans raised their online purchases and increased their dining out, U.S. retail sales climbed more than anticipated in July, indicating that the economy continued to grow early in the third quarter and preventing a recession.

The Commerce Department’s report on Tuesday also revealed consumers splurging on apparel, sporting items, and hobbies, highlighting their tenacity in the face of the Federal Reserve’s ruthless interest rate increases to control inflation.

It caused Goldman Sachs economists to massively increase their third-quarter gross domestic product tracking estimate, bringing it up to 2.2% annualised rate, by seven tenths of a percentage point. The quarter from April to June saw the GDP expand at a 2.4% rate.

Strong salary increases resulting from a tight labour market are supporting demand. Despite continued signals of improvement in consumer spending, experts did not anticipate the Fed to raise interest rates next month due to declining inflation.

The government said this week that consumer prices increased marginally in July but core inflation, or underlying inflation, slowed down even further.

“As long as core inflation continues to fall rapidly, resilient growth won’t in itself be enough to prompt further rate hikes from the Fed,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics.

Last month, retail sales increased by 0.7%. Sales for June increased by 0.3% instead of the previously reported 0.2%, according to revised data. Reuters polled economists, who predicted retail sales would increase by 0.4%. In July, sales rose 3.2% compared to the same month last year.

The majority of retail sales are of goods, and therefore are not inflation-adjusted. They probably benefited from Amazon’s record-breaking Prime Day offer from last month, which brought some August spending forward. Following a 1.5% increase in June, online sales increased by 1.9%.

Additionally, it seems that parents began their back-to-school shopping early, which increased sales in other categories. Sales in clothing stores rose 1.0%.

Sales increased by 1.5% as more money was spent by consumers on athletic products, hobbies, literature, and musical instruments. Sales at grocery stores and department stores also increased. Service station sales increased by 0.4%.

Building material and garden supply store receipts increased by 0.7%. The lone services sector included in the retail sales report—sales at restaurants and bars—rose 1.4% after increasing by 0.8% in June. Going out to eat is a major sign of household finances, according to economists.

However, after increasing 0.7% in June, the value of sales at vehicle dealerships decreased by 0.3%. Furniture store receipts fell 1.8%, and sales at electronics and appliance retailers fell 1.3%.

“The report dispels any lingering recession fears, and shows how the healthy labor market is paying dividends for consumers,” said David Russell, vice president of Market Intelligence at TradeStation. “There’s a danger that today’s good news for Main Street will become bad news for Wall Street.”

Investors’ concerns over potential rate increases caused stocks to trade lower on Wall Street. In relation to a currency basket, the dollar decreased. Prices for US Treasury notes varied.

However, most economists think the Fed is likely done raising rates, and they are starting to become more open to the concept that the Fed could steer the economy towards a “soft landing” rather than the recession they had predicted since last year. Since March 2022, the Fed has increased its benchmark overnight interest rate by 525 basis points, bringing it to the current range of 5.25% to 5.50%.

The purchasing power of consumers is increasing as inflation declines. Additionally, households are borrowing money to pay for purchases.

Although lower-income people have used up their COVID-19 of surplus savings, there is still a sizable volume of money set aside to encourage consumer spending.

While a separate report released on Tuesday by the Labour Department revealed that import prices rose 0.4% in July despite an increase in the price of fuel, underlying import inflation remained low. In July, import costs declined 4.4% compared to the same month last year.

“It is encouraging that nonfuel prices remain subdued, which has offset some of the impact from higher fuel prices, but also signals that disinflationary pressure is widespread,” said Matthew Martin, a U.S. economist at Oxford Economics in New York.

Retail sales increased 1.0% in July when cars, petrol, building supplies and food services were excluded. These so-called core retail sales increased by 0.5% in June instead of the previously estimated 0.6%, according to revised data.

The consumer expenditure portion of GDP most closely resembles core retail sales. The U.S. economy, which is largely driven by consumer spending, got off to a great start in the July-September quarter after slowing down in the second quarter, according to July’s high core retail sales.

However, there are worries that as the year comes to a close, spending might slow down. Some economists contend that slower job growth may limit pay increases. Savings are being depleted, and after a hiatus, millions will start repaying their college debts following the end of a moratorium. 

According to data released by the New York Fed last week, credit card balances have increased significantly, and delinquencies reached an 11-year high in the second quarter. But for some economists, consumer spending is mostly determined by the labour market.

“The momentum for consumers will eventually run out of steam, but this will require a significant loosening of labor conditions, a process which has played out much more slowly than expected this year,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.

(Adapted from GulfNews.com)

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