Someone forgot to tell the American consumer that interest rates are supposedly so restrictive that they risk pushing the U.S. economy into a recession.
The Department of Commerce said on Thursday that retail sales jumped one percent in July, the largest monthly increase since January of 2023. This was far ahead of the 0.3 percent increase expected by economists.
Sixty percent of the increase was due to a 3.6 surge in purchases at car and truck dealerships and auto parts shops. After a cyberattack shutdown systems at auto dealers across the country in June, pushing sales down 3.4 percent, there was a considerable amount of pent-up demand. Excluding parts shops, sales at dealerships rose four percent after last month’s 3.9 percent decline.
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We would not write this off as an irrelevant fluke. Although the rise was exaggerated by the June computer outage, the very fact this resulted in pent-up demand suggests that consumers are still able and willing to spend on big ticket items such as cars and trucks. This is not the behavior we would expect from a consumer seeing a looming downturn.
Excluding autos, retail sales rose by a strong 0.4 percent. This was also stronger than the consensus forecast, indicating that many analysts have overestimated the extent of softening in the economy.
The Shopping Ain’t Dropping
The increase in sales was broad-based, with most categories tracked by the government showing increases. This is an indication that consumers remain resilient despite the increase in unemployment in July.
So-called nonstore retailers—mostly, online sales—saw an increase of 0.2 percent, which is a pretty healthy gain after last month’s enormous 2.2 percent increase. That prior month’s gain was related to Amazon’s Prime Day and similar promotions by competitors. What the July gain indicates is that this didn’t completely pull-forward demand, leaving room for still more growth.
Furniture store sales, which have been somewhat week this year, grew 0.5 percent in July. Electronic and appliance store sales jumped 1.6 percent. These tend to be discretionary purchases, especially in a period of low real estate transactions. And they are pricey items. Spending in these categories is another indicator of consumer strength.
The two biggest categories of consumer spending after auto dealers are grocery stores and so-called general merchandise stores. The latter include everything from dollar stores to department stores to big box stores like Walmart and Costco. Sales at the general merchandise stores rose 0.5 percent, the largest gain since March. Sales at grocery stores climbed one percent.
Gas stations are the next biggest category. Sales here climbed 0.1 percent. But outside of truly catastrophic events, these sales are a function of gas prices and not necessarily indicative of economic activity.
Sales at health and personal care stores, the next biggest category, rose by a strong 0.8 percent. Sales at restaurants, one of the most discretionary categories, rose by a solid 0.3 percent.
There were declines. The group the government calls “miscellaneous store retailers”—this includes pet shops, florists, bait-and-tackle stores, gun shops—saw a 2.5 percent decline. Apparel stores, a relatively small category, also experienced falling sales.
Walmart reported sales that beat estimates on Thursday, confirming what the government sales report suggested about the strength of the consumer. The company also raised its full-year guidance, sending its stock up to all-time highs.
Why Would the Fed Rush Bigger Cuts?
The bigger picture is that this is a retail environment consistent with a growing economy and either a soft-landing or no-landing scenario. There are no signs of a significant slowdown or building recessionary pressures. Indeed, retail sales are growing at a pace that is above the longterm trend for the economy. One possibility is that easing inflation might be lessening the “sticker shock” of high prices, encouraging spending.
The report supports the view that the Fed will only cut interest rates by 25 basis points in September, resisting the calls for a larger cut. Indeed, with consumer spending this strong, a larger cut would likely lead to inflationary demand. Similarly, the Fed is likely to take November off and then cut again in December rather than cut at every meeting for the rest of the year. That would leave us with 50 basis points of cuts, significantly less than the 100 the market is current pricing in.
