US retail sales beat expectations; labour market stable

Khaleej Times

2 days ago

U.S. retail sales rebounded more than expected in June, suggesting the economy was regaining momentum and giving the Federal Reserve cover to delay cutting interest rates while it gauges the inflation fallout from import tariffs.
The economy's improving fortunes were reinforced by other data from the Labour Department on Thursday that showed first-time applications for unemployment benefits dropped to a three-month low last week, consistent with steady job growth in July. The U.S. central bank is under pressure from President Donald Trump to lower borrowing costs. The Fed is, however, expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range at its policy meeting later this month.
"For today, the message is clear," said Carl Weinberg, chief economist at High Frequency Economics. "The consumer is in good shape and does not need a boost from Fed rate cuts for now."
Retail sales increased 0.6% last month after an unrevised 0.9% drop in May, the Commerce Department's Census Bureau said.
Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would gain 0.1%. Sales advanced 3.9% on a year-over-year basis. Part of the nearly broad rise in retail sales last month was likely due to tariff-driven price increases rather than volumes. Inflation data this week showed solid increases in June in the prices of tariff-sensitive goods like household furnishings and supplies, appliances, sporting goods and toys.
Still, the retail sales rebound after two straight monthly declines was welcome. Sales had declined as the boost from households rushing to buy motor vehicles to avoid higher prices from import duties waned. Some economists said worries of even higher prices were behind the rise in sales last month.
"Inflation fears may actually be boosting retail sales today as consumers make purchases before even higher prices hit in the months ahead," said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Auto dealerships led the rise in sales, with receipts increasing 1.2% after decreasing 3.8% in May. Building material garden equipment store sales increased 0.9%, as did receipts at clothing retailers. Online retail sales climbed 0.4%, while those at sporting goods, hobby, musical instrument and book stores rose 0.2%.
Sales at food services and drinking places, the only services component in the report, increased 0.6%. Economists view dining out as a key indicator of household finances.
But receipts at electronics and appliance stores dipped 0.1%, as did those at furniture outlets. Economists said this suggested tariff-related price rises were suppressing demand.
U.S. stocks were trading higher. The dollar gained versus a basket of currencies. U.S. Treasury yields were mostly lower.
Solid spending
Retail sales excluding automobiles, gasoline, building materials and food services increased 0.5% last month after a downwardly revised 0.2% in May. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have increased 0.4% in May.
Despite the downward revision to the May data, consumer spending likely picked up after nearly stalling in the first quarter. The Atlanta Fed is currently forecasting GDP rebounded at a 2.6% annualized rate in the second quarter after contracting at a 0.5% pace in the January-March period.
Consumer spending is being supported by a stable labor market. A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 221,000 for the week ended July 12, the lowest level since April. Economists had forecast 235,000 claims for the latest week.
Motor vehicle assembly plant closures due to maintenance, annual retooling for new models and other reasons could be influencing the data. Auto manufacturers typically idle assembly lines in summer, though the timing often varies, which could throw off the model that the government uses to strip out seasonal fluctuations from the data. Nonetheless, layoffs remain historically low. The claims report covered the period during which the government surveyed employers for the nonfarm payrolls component of July's employment report. Claims fell between the June and July survey periods. Nonfarm payrolls increased by 147,000 jobs in June, though nearly half of the positions were in the government sector, mostly state education.
Risks are, however, rising for both the labor market and consumer spending. Trade policy uncertainty has left companies hesitant to increase hiring. As a result, many laid-off workers are experiencing long bouts of unemployment.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 2,000 to a seasonally adjusted 1.956 million during the week ending July 5, the claims report showed.
Wage growth has also slowed. While the stock market has rebounded, house prices have declined in many markets, a reduction in household wealth that could hinder spending.