Retail therapy for an anxious market
Someone appears to have forgotten to tell American consumers that interest rates are so restrictive that they risk plunging the U.S. economy into recession.
The Commerce Department said Thursday Retail sales increased 1% in July.That was the biggest monthly increase since January 2023. It was well above the 0.3% increase economists had expected.
60% of the increase 3.6x increase in purchases at auto and truck dealerships and auto parts storesThere was significant pent-up demand after a cyberattack took down systems at auto dealerships nationwide in June, causing sales to fall 3.4%. Excluding parts stores, dealer sales rose 4% after falling 3.9% the previous month.
We wouldn’t dismiss this as mere coincidence: While the price hikes caused by June’s computer glitch have been exaggerated, the fact that it has created pent-up demand suggests consumers may still be able to buy. Willingness to spend money on high-value items Buying things like cars and trucks is an unexpected move for consumers as a recession looms.
Excluding automobiles Retail sales were strong, increasing 0.4%.That was stronger than the consensus forecast, suggesting that many analysts had overestimated the extent of the economy’s softening.
Shopping doesn’t fall off
The sales increases were broad-based, with increases in most categories tracked by the government. Consumers remain resilient This despite the rise in unemployment in July.
So-called non-store retailers (mostly online sellers) increased 0.2%, a fairly healthy gain after a much bigger 2.2% increase last month, which was tied to Amazon’s Prime Day and similar promotions by rivals. July’s increase suggests it wasn’t a total front-loading of demand. There is still room for further growth.
Sales at furniture stores, which have been somewhat sluggish this year, rose 0.5% in July. Sales at electrical and appliance stores increased 1.6%. These tend to be discretionary purchases, especially during times of low real estate activity. They’re also big-ticket items, and spending in these categories is another indicator of consumer strength.
After auto dealerships, the two largest categories of consumer spending are Grocery stores and general merchandise storesThe latter includes everything from dollar stores to department stores to big box stores like Walmart and Costco. General merchandise store sales rose 0.5%, the biggest increase since March. Grocery store sales rose 1%.
Gas stations are the next largest category. Sales here increased by 0.1%. But barring a truly catastrophic event, these sales will likely continue to grow with the price of gasoline. Not necessarily indicative of economic activity.
The next largest category, health and personal care stores, saw sales of It increased significantly by 0.8%. Restaurant sales, one of the most discretionary categories, rose a solid 0.3%.
There were declines, too, including a 2.5% drop in what the government calls “general retailers” — pet shops, florists, fishing tackle shops and gun stores. Sales also declined at apparel stores, which are relatively small businesses.
Walmart The company reported better-than-expected sales on Thursday, confirming consumer strength suggested by the government’s sales report. The company also raised its full-year outlook, sending its shares to an all-time high.
Why is the Fed rushing to make such a big rate cut?
The bigger picture is that this is a retail environment consistent with economic growth and a soft landing or no landing scenario. There are no signs of a significant economic slowdown or increasing recessionary pressures. In fact, retail sales are growing faster than the economy’s long-term trend, and easing inflation may be encouraging spending by reducing the “price tag shock” caused by high prices.
Report Supports view that the Fed will only cut interest rates by 25 basis points in SeptemberThe Fed has resisted calls for a bigger cut. Indeed, with consumer spending so strong, a bigger cut would likely lead to inflationary demand. Similarly, the Fed is likely to recess in November and cut rates again in December, rather than cut at every meeting for the rest of the year. That would bring the cut to 50 basis points, significantly less than the 100 basis points that markets are currently pricing in.
