US retail sales saw an unexpected increase in August, fueled by strong online sales that offset a decline in receipts at auto dealerships. This data suggests that the economy remains on firm footing heading into the third quarter.
The Commerce Department reported on Tuesday that retail sales were slightly stronger than initially estimated in July, reinforcing optimism about the economy's strength. Combined with a drop in the unemployment rate last month, this development challenges market expectations for a half-percentage-point interest rate cut by the Federal Reserve on Wednesday.
"There does not appear to be any reason for Fed officials to start with a larger 50 basis points rate cut because whatever stress exists in the labor market isn't translating into weaker economic demand," said Christopher Rupkey, chief economist at FWDBONDS. "If this is an economy on the brink of recession, consumers certainly don't see it."
Retail sales rose by 0.1% in August following an upwardly revised 1.1% surge in July. Economists had forecasted a decline of 0.2% after the previously reported 1.0% increase in July. On a year-over-year basis, retail sales increased by 2.1% in August. Notably, online store sales rebounded by 1.4% last month after a decline in July, while sales at gasoline stations fell by 1.2% due to lower pump prices.
However, not all sectors performed well. Furniture store sales dropped by 0.7%, and receipts at electronics and appliance outlets decreased by 1.1%. The odds of a 50 basis points rate cut on Wednesday remained roughly at 67%, while the likelihood of a quarter-point reduction was around 33%.
The unemployment rate dropped to 4.2% in August, down from a near three-year high of 4.3% in July, suggesting underlying strength in the labor market. Despite concerns over declining savings rates, consumer spending — which makes up more than two-thirds of the economy — remains robust, supported by steady wage gains and strong household balance sheets.
Core retail sales, which exclude automobiles, gasoline, building materials, and food services, increased by 0.3% in August, indicating that consumer spending stayed elevated in the third quarter. Current growth estimates for the third quarter are around 2.5% on an annualized basis, following a 3.0% pace in the second quarter.
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