Americans stepped up their spending at retailers last month by the most in a year and a half, easing concerns that the economy might be weakening under the pressure of higher prices and elevated interest rates.
The Commerce Department reported Thursday that retail sales jumped 1% from June to July, the biggest such increase since January 2023, after having declined slightly the previous month. Auto dealers, electronics and appliance stores, and grocery stores all reported strong sales gains.
The July retail sales data provided reassurance that the U.S. economy while slowing under the pressure of high interest rates, remains resilient. It showed that America’s consumers, the primary driver of economic growth, are still willing to spend.
The prospect of a still-growing economy is likely to be promoted by Vice President Kamala Harris’ presidential campaign, which is preparing to roll out policies Friday to ban “price gouging” on groceries. On Wednesday, her opponent, former President Donald Trump slammed the economic record of the Biden-Harris administration, though he wildly inflated cost increases on food and monthly mortgage payments.
Other economic data released Thursday was also mostly positive, including a report on first-time applications for unemployment benefits. The figures show that businesses are mainly holding onto their workers and not increasing layoffs.
With Americans spending more, economists at Morgan Stanley have boosted their forecast for growth in the July-September quarter to a 2.3% annual rate, from an earlier estimate of 2.1%. The economy expanded at a healthy 2.8% rate in the April-June quarter.
All told the latest data is consistent with an economy that is headed toward a “soft landing,” in which the Federal Reserve raises interest rates enough to cool inflation but not so much as to cause a recession.
“The ongoing resilience of consumer spending should ease recession fears and reduce the odds markets have placed on a larger (half-point) cut” at the Fed’s meeting in mid-September, said Michael Pearce, an economist at Oxford Economics. Instead, economists increasingly expect the Fed to begin cutting interest rates next month with a modest quarter-point reduction in its key rate, which affects many consumer and business loans.
Adjusted for inflation, sales rose about 0.8% last month. Excluding gas station sales, which don’t reflect Americans’ appetite to spend, retail purchases also rose 1%.
Consumers have been pummeled since the pandemic by high prices and elevated interest rates. Yet at the same time, average wages have also been rising, providing many households with the means to keep spending.
Inflation-adjusted wages have increased slightly from a year ago. Upper-income households have also seen their wealth increase, with stock prices and home values having jumped in the past three years. Increases in wealth can encourage more spending.
Auto sales jumped 3.6% last month, the largest increase since January 2023. It marked a rebound from the previous month, when a cyberattack involving many dealerships slowed sales.
Sales at electronics and appliances stores surged 1.6%. And they rose 0.9% at hardware stores and garden centers. Restaurant sales were up 0.3%, a sign that Americans are still willing to spend on discretionary items, such as eating out.
Financial markets had plunged earlier this month on fears surrounding the economy after the government reported that hiring was much weaker than expected in July and the unemployment rate rose for a fourth straight month.
Yet since then, economic reports have shown that layoffs are still low and that activity and hiring in services industries remain solid. Americans are also still splurging on services, such as travel, entertainment, and health care, which are not included in Thursday’s retail sales report.
Still, some economists worry that much of Americans’ spending now is being fueled by the increased use of credit cards. And the proportion of Americans who are falling behind on their credit card payments, while still relatively low, has been rising.
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But cooling inflation may give households a needed boost. Consumer prices rose just 2.9% in July from a year earlier, the government said Wednesday. That was the smallest year-over-year inflation figure since March 2021. Core inflation, which excludes volatile food and energy costs, slipped for the fourth straight month.
While Americans are still willing to spend, they are increasingly searching out bargains. On Thursday, Walmart, the nation’s largest retailer, reported strong sales in the three months that ended July 31.
More Americans appear to be shopping at lower-price outlets like Walmart. The company also boosted its sales outlook for this year and said that it hasn’t seen any signs of weakness from the consumer.
Other companies are also starting to offer lower prices to entice consumers, a trend that is helping slow inflation. McDonald’s said its global same-store sales fell for the first time in nearly four years in the second quarter. The company introduced a $5 meal deal at U.S. restaurants in June; most franchisees plan to extend that deal through August.
Evan Louey-Dacus, who lives in New York City and works in corporate event planning, said that with many food prices persistently high, he has shifted his spending toward discount grocers.
“When inflation really started hitting grocery prices hard,” said Louey-Dacus, 22, “my tastes just changed. Instead of getting lots of potatoes or vegetables, I started getting lots of rice. Instead of getting lots of eggs, I started getting deli meat or I started shopping more locally.”
Louey-Dacus has also been buying second-hand items at thrift stores and turning to open-box items, which have been previously owned. His latest purchase: A laptop in an open box at Best Buy that was discounted from around $750 to $600.
Arie Kotler, CEO of Arko Corp., a convenience chain based in Richmond, Virginia, said he’s noticed that shoppers have cut back their spending on discretionary items like salty snacks and candy bars since May. He said he thinks people are struggling with high interest rates on credit cards, with many of them maxed out.
The number of Americans filing new applications for unemployment benefits dropped to a one-month-low last week, suggesting an orderly labor market slowdown remained in place, and dashing financial market hopes that the Federal Reserve could cut interest rates by 50 basis points next month.
The economy's resilience was reinforced by other data on Thursday showing retail sales increased by the most in 1-1/2 years in July. Investors have been on edge after a jump in the unemployment rate to a near three-year high of 4.3% in July sparked fears that the economy was either in recession or nearing a downturn, concerns not shared by most economists.
"The economy is not going off the rails," said Christopher Rupkey, chief economist at FWDBONDS. "There is no storm brewing in the labor markets that could possibly argue for a giant-sized 50 basis points rate cut."
Initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 227,000 for the week ended Aug. 10, the Labor Department said. Economists polled by Reuters had forecast 235,000 claims for the latest week.
The second straight weekly decline erased the increase in late July, which had boosted claims to an 11-month high. Much of the rise last month was blamed on temporary motor vehicle plant shutdowns and disruptions caused by Hurricane Beryl in Texas.
Unadjusted claims fell 4,500 to 199,530 last week amid big declines in California, Texas, and Massachusetts.
Layoffs remain historically low, with much of the slowdown in the labor market coming from businesses scaling back hiring, trailing an immigration-induced surge in labor supply. The U.S. central bank's 525 basis points worth of rate hikes in 2022 and 2023 are curbing demand.
Financial markets lowered the odds of a half-percentage-point rate reduction at the Fed's Sept. 17-18 policy meeting to 27.5% from 41.5% before the data, according to CME Group's FedWatch tool. They saw a 72.5% chance of a 25-basis-point rate cut, up from 58.5% earlier.
The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for a year.
Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. Treasury prices fell.
"If the economy continues to be resilient, especially in conjunction with slowing inflation, then the Fed can begin a rate-cutting cycle without the economy entering recession and history shows this is an extremely positive environment for the stock market," said Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance.
Companies pulling back on hiring, however, means it is becoming harder for laid-off workers to land new jobs.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 7,000 to a seasonally adjusted 1.864 million during the week ending Aug. 3, the claims report showed. The so-called continued claims are near levels last seen in late 2021.
Jobless claims
BROAD RETAIL SALES GAINS
Nonetheless, the labor market continues to underpin consumer spending through still-high wage growth. A separate report from the Commerce Department's Census Bureau showed retail sales jumped 1.0% in July, the largest increase since January 2023, after a downwardly revised 0.2% drop in June.
An employee hiring sign with a QR code is seen in a window of a business in Arlington, Virginia, U.S., April 7, 2023. REUTERS/Elizabeth Frantz/ File Photo Purchase Licensing Rights, opens a new tab
Economists had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.3% after previously being reported as unchanged in June.
Retail sales increased 2.7% year-on-year in July. Subsiding inflation, bargain hunting and consumers trading down to lower-priced substitutes are sustaining spending.
Reuters Graphics
Receipts at motor vehicle and parts dealers rebounded 3.6%, reversing a 3.4% drop in June that was blamed on a cyberattack.
Online store sales gained 0.2% after jumping 2.2% in June. Sales at gasoline stations edged up 0.1%. Building material and garden equipment store sales increased 0.9%.
Sales at food services and drinking places, the only services component in the report, rose 0.3% after ticking up 0.1% in June. Economists view dining out as a key indicator of household finances. Furniture store sales advanced 0.5%. Receipts at electronics and appliance outlets vaulted 1.6%.
But consumers spent less at clothing retailers as well as sporting goods, hobbies, musical instruments, and bookstores.
Retail sales excluding automobiles, gasoline, building materials, and food services rose 0.3% last month after advancing by an unrevised 0.9% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Last month's gain and June's unrevised increase in core retail sales put consumer spending on a higher growth path early in the third quarter.
Economists at Morgan Stanley raised their third-quarter consumer spending growth forecast to a 2.8% annualized rate from a 2.1% pace. They upgraded their GDP growth estimate to a 2.3% rate from a 2.1% pace. Consumer spending increased at a 2.3% rate in the April-June quarter, contributing to lifting the economy to a 2.8% growth pace during that period.
While some economists have pointed to a decline in savings as portending weaker consumer spending, Bank of America Institute data suggests otherwise.
"It's important to note that not all the drawdown in savings and checking balances has been spent, either," Bank of America Institute said in a note.
"Some households have been moving their money into less-liquid investment accounts. Some households may also have been taking money out of liquid deposits to invest directly in stocks, bonds, and other financial assets."
Reuters Graphics
The flow of upbeat reports was dimmed somewhat by a third report from the Fed showing manufacturing production fell 0.3% in July after being unchanged in June.
But a sharp drop in motor vehicle production amid annual plant shutdowns for retooling and disruptions from Hurricane Beryl accounted for much of the decline in factory output. Excluding motor vehicles, manufacturing output rose 0.3%.
"The temporary disruptions should reverse this month," said Thomas Ryan, North America economist at Capital Economics. "Excluding those temporary factors ... it reinforces our view that a soft landing is the most likely outcome for the economy."
The Biden administration said Thursday that drug price negotiations will knock hundreds of dollars — in some cases thousands — off the list prices of 10 of Medicare’s most popular and costliest drugs.
The discounts agreed to after months of negotiations with drug manufacturers, range between 38% and 79% on the medication’s list price, which is the cost of medication before discounts or rebates are applied — not the price people actually pay for prescriptions.
Medicare spent $50 billion covering the drugs last year and taxpayers are expected to save $6 billion on the new prices, which do not go into effect until 2026. Older adults could save as much as $1.5 billion in total on their medications in out-of-pocket costs. Administration officials released few details about how they arrived at those calculations.
The newly negotiated prices will impact the price of drugs used by millions of older Americans to help manage diabetes, and blood cancers and prevent heart failure or blood clots. The drugs include the blood thinners Xarelto and Eliquis and diabetes drugs Jardiance and Januvia.
It’s a landmark deal for the Medicare program, which provides healthcare coverage for more than 67 million older and disabled Americans. For decades, the federal government had been barred from bartering with pharmaceutical companies over the price of their drugs, even though it’s a routine process for private insurers.
“For years, millions of Americans were forced to choose between paying for medications or putting food on the table, while Big Pharma blocked Medicare from being able to negotiate prices on behalf of seniors and people with disabilities,” President Joe Biden said in a statement. “But we fought back -– and won.”
The drug deals will become a focal point for Vice President Kamala Harris’ presidential campaign, especially since she cast the tiebreaking vote to pass the law. She will join Biden on Thursday to announce the drug prices, in what will be their first joint speaking appearance since she replaced him at the top of the Democratic ticket, as they both struggle to persuade voters that costs will trend down after years of above-normal inflation.
Harris is set to release part of her economic agenda on Friday in North Carolina, where she plans to detail other ways to help cut costs and boost incomes for the middle class.
The pair last appeared publicly together to welcome back to the U.S. Americans detained in Russia who were freed as part of a massive prisoner swap earlier this month.
Powerful drug companies unsuccessfully tried to file lawsuits to stop the negotiations, which became law in 2022, when a Democratic-controlled Congress passed the Inflation Reduction Act (IRA), overhauling several Medicare prescription drug regulations. But executives of those companies have also hinted in recent weeks during earnings calls that they don’t expect the negotiations to impact their bottom line.
Pharmaceutical officials blasted the news from the White House, saying it will spread healthcare costs to taxpayers in other ways, including their Medicare premiums.
“The administration is using the IRA’s price-setting scheme to drive political headlines, but patients will be disappointed when they find out what it means for them,” Steve Ubl, the president of the Pharmaceutical Research and Manufacturers of America (PhRMA). “The ironically named Inflation Reduction Act is a bad deal being forced on American patients: higher costs, more frustrating insurance denials, and fewer treatments and cures for our loved ones.”
Next year, the Department of Health and Human Services can select another 15 drugs for price negotiations.
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