Consumer spending held firmer than expected in July as inflationary pressures showed signs of easing, the Commerce Department said Thursday.
Retail sales rose 1% from the previous month, seasonally adjusted but inflation-adjusted, according to the report. Economists surveyed by Dow Jones had expected a 0.3% increase. June sales were initially reported as flat, but were revised down to a 0.2% decline.
Excluding auto-related sales, sales rose 0.4%, also beating expectations of a 0.1% increase.
There was also good news on the labor market: Initial claims for unemployment benefits for the week ending August 10 came in at 227,000, down 7,000 from the previous week and below expectations of 235,000.
Sales growth was led by gains at auto and parts dealers (3.6%), electronics and appliance stores (1.6%), and food and beverage stores (0.9%). Other retailers saw a steep decline of 2.5%, while sales at gas stations increased just 0.1% and clothing stores fell 0.1%.
Stock market futures surged following the release of the data on Thursday morning, and Treasury yields also jumped.
“This is yet another piece of evidence that the U.S. consumer still has the muscle to grow faster than expected,” wrote macro analyst Richard de Chazal at William Blair. “This is another solid report, which is at odds with a consumer situation that’s on the brink of collapse.”
The report came out the same week as data showing inflation eased slightly in July.
Prices consumers pay for goods and services rose 0.2% month-on-month, helping annual inflation fall to 2.9%, the lowest since March 2021. At the same time, wholesale prices rose just 0.1% month-on-month and 2.2% year-on-year.
Inflation remains above the Federal Reserve’s 2% target, but the data suggests price pressures that peaked two years ago continue to ease.
The counterargument was that in separate data released on Thursday, the Labor Department said import prices rose 0.1% in July, slightly above expectations of no change. On a year-on-year basis, import prices rose 1.6%, the biggest increase since December 2022.
Financial markets expect the Fed to respond with its first interest rate cut in more than four years when it next meets in September, but consumer resilience could give policymakers further reason to be cautious about cutting rates.
Reflecting the theme of stable consumers, Walmart The company on Thursday reported strong financial and revenue results for the last quarter and raised its outlook, but also offered a slight warning for the second half of 2024.
Investors are not only hoping for lower interest rates, but also increasingly expecting the Fed to shift its attention from a focus on inflation to a broader consideration of possible weakening in the labor market and other conditions.
The Labor Department also reported that continuing claims for unemployment benefits, which are counted with a one-week lag, fell slightly to 1.864 million. The weaker-than-expected July employment report raised concerns that the labor market may be weakening.
Other economic data released Thursday showed the manufacturing situation was fragile.
The New York Fed’s Empire State Manufacturing Index rose slightly but was still in negative territory at minus 4.7, just above the minus 6 forecast, while the Philadelphia Fed’s manufacturing index fell to minus 7, the first negative reading since January and well below the 7.9 forecast.
Both indexes measure the percentage of companies reporting expansion versus contraction.
In other economic news on Thursday, the Fed reported that industrial production fell 0.6% in July. The effects of Hurricane Beryl led to total production declining 0.3%, below expectations of a -0.1% decline. Capacity utilization also fell to 77.8%, below expectations of 78.5%.
