Consumer spending held up well in July as inflation slowed and retail sales came in stronger than expected this month, the Commerce Department said Tuesday.
The advanced retail sales report showed a seasonally adjusted increase of 0.7% for the month, better than the Dow Jones estimate of 0.4%. Excluding cars, sales increased by 1%, also against expectations of 0.4%. Both readings were the best monthly gains since January.
Because the figures are not adjusted for inflation, they showed that a consumer is able to stay ahead of the price increases of the past two years. The consumer price index rose 0.2% this month, indicating solid demand.
July figures were boosted by a 1.9% increase in spending at online retailers, while sporting goods and related stores rose 1.5% and hospitality and drinking establishments rose 1.4%.
On the other hand, furniture sales fell 1.8% and electronics and appliance stores reported a decline of 1.3%. Gas station sales rose by just 0.4% this month, despite rising prices at the pump.
The report adds to the narrative that the US economy could avoid a long-awaited recession caused by a series of rate hikes by the Federal Reserve aimed at controlling inflation.
In a series of 11 hikes since March 2022, the central bank has raised its key interest rate by 5.25 percentage points to the highest level in more than 22 years. Regardless, consumers, who power about two-thirds of the entire $26.8 trillion U.S. economy, have persevered.
“Despite the added pressure on the Fed, Americans’ continued ability to spend speaks to the strength of the U.S. economy in the face of global economic challenges,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.
As savings begin to dry up, consumers have shown a willingness to use credit cards, with balances surpassing $1 trillion for the first time in the second quarter of 2023.
The July data showed widespread spending, with most categories showing increases. However, motor vehicle sales also fell by 0.3%. On a twelve-month basis, sales increased by 3.2%, which is exactly in line with the annual increase in the CPI.
However, a separate report on Tuesday showed inflation pressures persisting after reaching their highest level in more than 40 years in the summer of 2022.
According to the Bureau of Labor Statistics, import prices rose 0.4% higher in July than the 0.2% estimate. That was only the second monthly gain in 2023, as interest rates fell 4.4% year over year. A year ago the annual increase was 8.8%.
Almost all of the increase came from a 3.6% increase in imported fuel prices. According to the BLS, import prices remained unchanged when excluding fuel.
However, export prices rose even more, rising by 0.7% this month. However, they are down 7.9% from a year ago, after rising 12.9% between July 2021 and July 2022.
“Consumers spent July energized, perhaps with a sense of relief that inflation is easing even if there is no recession or major job losses,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Is a soft landing still on the table? It’s certainly possible, but it seems like a stretch to conclude that it’s likely.”
An additional report Tuesday presented another mixed bag of data.
The Empire State Manufacturing Survey, which measures activity in the New York region, fell 20 points to -19 in August. That represents the difference between companies reporting growth versus contraction, and was much lower than the -1.4 Dow Jones estimate.
New orders and shipments fell sharply this month, while prices paid and received rose significantly higher.
Despite the poor data in August, the future business conditions index, which measures expectations six months from now, rose to 19.9, an increase of 6 points. That was because new orders and shipments, the big drag in the survey of current conditions, “increased significantly,” while employment is “expected to grow significantly.”
Expectations for capital expenditure also rose sharply.