WASHINGTON — Americans raised spending at retailers last month by the most in a year and a half, easing concerns that the economy could be weakened by higher price pressures and higher interest rates.
The Commerce Department reported Thursday that retail sales rose 1% from June to July, the biggest increase since January 2023, after a slight decline in the previous month. Auto dealers, electronics and appliance stores and grocery stores all reported strong sales gains.
July retail sales data provided reassurance that the US economy, while slowing under pressure from high interest rates, remains resilient. This shows that American consumers, who are the drivers of economic growth, are still willing to spend.
The growing economic outlook is likely to be promoted by the presidential campaign of Vice President Kamala Harris, who is preparing to launch a policy on Friday to ban “price gouging” on groceries. On Wednesday, his opponent, former President Donald Trump slammed the economic records of the Biden-Harris administration Wednesday, although he wildly inflated the cost of rising food and monthly mortgage payments.
Other economic data released Thursday was also largely positive, including reports on the first applications for unemployment benefits. The numbers show that businesses are mainly holding onto employees and not increasing layoffs.
With Americans spending more, economists at Morgan Stanley raised their forecast for growth in the July-September quarter to an annual rate of 2.3%, from a previous 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 the economy heading toward a “soft landing,” where the Federal Reserve raises interest rates enough to dampen inflation but not trigger a recession.
“Continued resilience in consumer spending should reduce fears of a recession and reduce the likelihood that the market has cut further (half a point)” at the Fed’s meeting in mid-September, said Michael Pearce, an economist at Oxford Economics. However, economists expect the Fed to begin cutting interest rates next month by lowering interest rates to a key level, which affects much consumer and business debt.
Adjusted for inflation, sales rose about 0.8% last month. And excluding gas station sales, which do not reflect America’s appetite for spending, retail purchases also rose 1%.
Consumers have been drained since the pandemic by high prices and high interest rates. But at the same time, average wages also rose, providing many households with the means to keep spending.
Inflation-adjusted wages have risen slightly from a year ago. High-income households have also increased their wealth, with stock prices and house values ​​rising over the past three years. An increase in wealth can encourage more spending.
Auto sales rose 3.6% last month, the biggest increase since January 2023. This marked a rebound from the previous month, when a cyber attack involving many dealerships dented sales.
Sales at electronics and appliance stores rose 1.6%. And they were up 0.9% in hardware stores and garden centers. Restaurant sales rose 0.3%, a sign that Americans are still willing to splurge on frivolous things like eating out.
Financial markets have tumbled earlier this month on fears about the economy after the government reported that hiring was weaker than expected in July and the unemployment rate rose for a fourth straight month.
But since then, economic reports have shown that layoffs are still low and activity and hiring in the service industry remain solid. Americans are also still spending on services, such as travel, entertainment, and health care, which were not included in Thursday’s retail sales report.
However, some economists worry that much of America’s spending today is being fueled by an increase in credit cards. And the proportion of Americans who fall behind on credit card payments, while still low, is rising.
But cooling inflation could provide a much-needed boost to households. Consumer prices rose just 2.9% in July from a year earlier, the government said Wednesday. This is the smallest annual inflation figure since March 2021. And core inflation, which excludes volatile food and energy costs, fell for the fourth straight month.
While Americans are still willing to spend, they are increasingly looking for deals. On Thursday, Walmart, the nation’s largest retailer, reported strong sales for the three months ended July 31.
More and more Americans seem to be shopping at discount stores like Walmart. The company also raised its sales outlook for this year and said there were no signs of consumer weakness.
Other companies also began offering lower prices to entice consumers, a trend that helped slow inflation. McDonald’s said 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 its US restaurants in June; most franchisees plan to extend that deal through August.
Arie Kotler, CEO of Arko Corp., a convenience chain based in Richmond, Virginia, said he noticed that shoppers have cut back 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 maxed out.
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AP Business Writers Anne D’Innocenzio in New York and Dee-Ann Durbin in Detroit contributed to this report.
