Consumer spending rose, better than expected

Consumer spending held up even better than expected in July as inflation pressures showed further signs of slowing, the Commerce Department reported Thursday.

Advance retail sales accelerated 1% on the month, according to figures adjusted for seasonality but not inflation. Economists surveyed by Dow Jones had expected a 0.3% increase. June sales were revised to a 0.2% decline after initially being reported as unchanged.

Excluding auto-related items, sales rose 0.4%, also better than the forecast of 0.1%.

There was also good news in the labor market: Initial claims for jobless benefits for the week ending August 10 totaled 227,000, a decrease of 7,000 from the previous week and lower than the estimate of 235,000.

Sales gains were driven by increases at vehicle and parts dealers (3.6%), electronics and appliance stores (1.6%) and food and beverage outlets (0.9%). Retailers of convenience goods saw a 2.5% drop, while gas stations saw revenue rise just 0.1% and clothing stores fell 0.1%.

Stock market futures rose sharply following the release of the data on Thursday morning, while Treasury yields also soared.

“Once again, this was further proof that the US consumer still has the ability to surprise on the upside,” wrote Richard de Chazal, macro analyst at William Blair. “This was another strong report, and inconsistent with a consumer on the brink of collapse.”

The report comes the same week as data showing inflation eased slightly in July.

Prices consumers pay for goods and services rose 0.2% on the month and the annual inflation rate slowed to 2.9%, its lowest level since March 2021. At the same time, wholesale prices rose just 0.1% on the month and 2.2% on the year.

While inflation figures remain above the Federal Reserve’s 2% target, the data show a continued easing of price pressures that peaked two years ago.

On Thursday, the Labor Department reported that import prices rose 0.1% in July, slightly above expectations for no change. On a year-over-year basis, import prices rose 1.6%, the largest increase since December 2022.

Financial markets expect the Fed to respond with its first rate cut in more than four years when it meets again in September, though a resilient consumer could give policymakers more reason to take a measured approach to cuts.

Echoing the theme of the stable consumer, Walmart Earlier Thursday, it reported solid earnings and sales for the prior quarter and raised its outlook, though it issued some cautionary notes about the second half of 2024.

In addition to seeking lower rates, investors also increasingly expect the Fed to shift its attention from a focus on inflation to a broader look at potentially weakening conditions in the labor market and elsewhere.

The Labor Department’s jobless claims figures also showed that continuing claims, which are filed with a one-week lag, fell slightly to 1.864 million. A weaker-than-expected July payrolls report had raised fears that the labor market may be weakening.

Other economic data released Thursday showed the manufacturing outlook is faltering.

The New York Fed’s Empire State manufacturing gauge rose slightly but is still in negative territory at -4.7, slightly better than the -6 estimate. At the same time, the Philadelphia Fed’s manufacturing gauge fell to -7, its first negative reading since January and well below the 7.9 forecast.

Both indices measure the percentage of companies reporting expansion versus contraction.

In other economic news, the Federal Reserve reported Thursday that industrial production fell 0.6% in July, worse than the -0.1% forecast, as Hurricane Beryl shaved 0.3 percentage points off the total. Capacity utilization also fell, to 77.8%, below the 78.5% estimate.