US retail sales unexpectedly rose, but inflation hampered spending

US retail sales unexpectedly rose, but inflation hampered spending


By Lucia Motikani

WASHINGTON (Reuters) – U.S. retail sales unexpectedly rebounded in August as Americans ramped up their car purchases and dined more amid lower gasoline prices, but demand is waning as the Federal Reserve aggressively raises interest rates to fight inflation.

With that said, consumer spending is likely to remain underpinned by continued strength in the labor market, with other data on Thursday showing that the number of people filing new claims for unemployment benefits last week fell to the lowest in more than three months.

The data was among the latest batch of reports released ahead of the Federal Reserve’s policy meeting next Wednesday. Combined with the sudden increase in consumer prices in August, the reports are likely to give the US central bank ammunition to introduce its third consecutive rate hike of 75 basis points.

โ€œDemand appears to be slowing this quarter, but job losses appear modest at this point in the economic cycle,โ€ said Christopher Robke, chief US economist at FWDBONDS in New York. “The recession clouds threatening the economy have gone offshore and this is likely to convince Fed officials to lock in their brakes more aggressively.”

Retail sales rose 0.3% last month, also supported by school shopping. But the data for July was revised down to show retail sales fell 0.4% instead of remaining unchanged as previously reported. Economists polled by Reuters had forecast sales would be unchanged, with estimates ranging from as low as 0.5% to as high as 0.5%.

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Retail sales, which mostly consist of goods and are not adjusted for inflation, rose 9.1% year over year in August.

Graphic: Retail Sales

Some economists were disappointed that monthly sales did not reflect the July decline, even though consumers took a respite from higher gasoline prices. They said this is a sign that stubbornly high inflation has been forcing some cuts to discretionary spending as consumers focus on essentials.

โ€œWhile consumers generally remain willing to spend, many families, especially those at the lower to middle end of the income spectrum, feel increasingly constrained by higher prices,โ€ said Gregory Daco, chief economist at EY-Parthenon in New York. “.

Although inflation remains a headache, it is unlikely to become entrenched, as a separate report from the Labor Department on Thursday showed import prices fell for the second consecutive month in August, thanks to lower commodity prices and a stronger dollar.

Gasoline prices are down about 20% from their June high, according to data from the US Energy Information Administration. Sales at service stations fell 4.2% last month, while receipts at car dealerships increased 2.8%.

Sales in apparel and general merchandise stores increased strongly, driven by school shopping. But online retail sales and mail-orders fell 0.7% after being boosted the previous month by Amazon (NASDAQ: Prime Day promotion).

Receipts at furniture stores decreased 1.3%, while retail sales of building materials and garden equipment increased 1.1%. Sales in electronics and electrical appliance stores decreased 0.1%. There were strong sales gains in hobby and musical instrument stores and bookstores. Receipts at bars and restaurants, the only service category in the retail sales report, rose 1.1%.

Stocks on Wall Street were lower. The dollar settled against a basket of currencies. US Treasury bond prices fell.

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narrow labor market

Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged last month. The data for July was revised downward to show an alleged core retail sales increase of 0.4% instead of 0.8% as previously reported.

Core retail sales closely align with the consumer spending component of GDP. The steady pace of consumer spending and strong export growth helped reduce the pressure on the economy from moderating the pace of inventory buildup in the second quarter.

Economists estimated that core inflation-adjusted retail sales fell at least 0.5% in August. This, combined with the downward revision for July, is likely to keep real consumer spending on a moderate growth path. Estimates of third-quarter economic growth are mostly less than the 2% annual rate.

The economy contracted at a rate of 0.6% last quarter after declining at a pace of 1.6% in the January-March period. But it’s not in the doldrums, as the income side of the ledger showed growth at a 1.4% rate of expansion in the second quarter, thanks to a flexible labor market.

A third report from the Labor Department showed that initial claims for state unemployment benefits fell by 5,000 to a seasonally adjusted 213,000 for the week ending September 10, the lowest level since the end of May.

Graphic: Jobless Claims

Despite concern about a possible recession next year due to higher borrowing costs, there was no increase in layoffs. Economists say companies are hoarding workers after they struggled with hiring last year as the COVID-19 pandemic forced some people out of the workforce partly due to the prolonged illness caused by the virus.

There were 11.2 million vacancies at the end of July, with two jobs for every unemployed person.

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

While tighter monetary policy has not slowed the labor market significantly, manufacturing is starting to feel tight. A fourth Federal Reserve report showed that production at factories barely increased in August.

Manufacturing suffering was amplified by the fifth report from the Federal Reserve Bank of Philadelphia which showed factory activity in the mid-Atlantic region contracted in September. In New York state, manufacturing stabilized this month, but at weaker levels, a sixth report from the Federal Reserve Bank of New York showed.

Graphic: Empire State and Philly Fed

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

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