Solid US retail sales alleviate some worries about the economy

WASHINGTON (Reuters) – US retail sales rose more than expected in August, indicating solid consumption that should continue to support a moderate pace of economic growth.

The report released Friday by the Commerce Department could further appease financial market concerns over a recession, fueled by a one-year trade war between the US and China, as well as the slowdown in global growth.

Nevertheless, the Federal Reserve is expected to further lower interest rates next Wednesday to ease the effect of trade tensions related to the longest economic expansion in its history.

Fed Chairman Jerome Powell said last week that he was not planning a recession, but reiterated that the US central bank would continue to act "as needed" to maintain the "high demand". expansion, which is now in its eleventh year. The Fed cut borrowing costs in July for the first time since 2008.

"The winds of the recession are not getting closer if the consumer continues to buy their heart," said Chris Rupkey, chief economist at MUFG. "It is unlikely that Fed officials will lower rates too deeply as they seek to take the lead in facing the risks that the economy faces facing an early reaction instead of being too late."

Retail sales rose 0.4% last month, driven by spending on motor vehicles, building materials, health care and recreation. August data was slightly revised upwards to indicate that retail sales rose 0.8% instead of 0.7%, as previously reported.

Economists polled by Reuters had predicted that retail sales would rise by 0.2% in August. Compared with last August, retail sales advanced 4.1%. Retail sales have increased for six consecutive months, the longest stretch since June 2017.

But with the Trump administration imposing a 15% tariff this month on Chinese consumer goods, such as televisions, clothes, bed linen, smart watches, and shoes, there are fears that retail sales are declining. Economists and retail groups expect companies to pass on consumer rights, raising prices for targeted products.

"It is too early to assess the impact of the new tariffs that came into effect at the beginning of this month, but they pose risks to household spending," said Jack Kleinhenz, chief economist at National Retail Federation in Washington.

Household concerns over the new tariff series were also highlighted by a slight rise in consumer confidence earlier this month. The University of Michigan said in its consumer survey that concerns about the impact of tariffs on the economy have increased in early September.

Excluding autos, gasoline, building materials and food services, retail sales advanced 0.3% last month, after a slightly revised downward trend of 0.9% in July. These so-called basic retail sales correspond most closely to the consumption expenditure component of the gross domestic product. Previously, they would have jumped 1.0% in July.

Consumer spending, which accounts for more than two-thirds of the economy, grew by 4.7% annualized in the second quarter, the highest growth in four-and-a-half years.

Economists expect consumer spending to slow to just below 4.0% in the third quarter, more than enough to keep economic growth at a steady pace, instead of sinking in the recession announced by the financial markets.

The .DXY dollar has not changed much from a basket of currencies, while US Treasury prices have fallen. The main US stock indexes remained virtually unchanged.

LOCOMOTIVE GROWTH

"The trend of growth in consumer spending still seems very strong," said Michael Feroli, an economist at JPMorgan in New York. "Consumers remain the locomotive of the economy."

Strong consumer spending is pushing retailers to increase their inventories. A second report released Friday by the Commerce Department showed that corporate inventories rose 0.4% in July after remaining unchanged in June. Inventories at retailers rebounded 0.8%, their highest level in six months, after falling 0.2% in June.

The increase in inventories bodes well for GDP growth this quarter. The Atlanta Fed is forecasting economic growth of 1.8% in the third quarter. The economy grew 2.0% in the April to June quarters, down from the strong first quarter pace of 3.1%.

The financial markets fully took into account a rate cut at the Fed's policy meeting on 17 and 18 September. Most economists expect further easing of monetary policy in October and December. Although underlying consumer prices have accelerated over the last three months, inflation is expected to remain moderate.

In a fourth report released on Friday, the Labor Department said import prices fell 0.5 percent last month due to lower prices for petroleum products and food products. In the 12-month period ending in August, import prices decreased 2.0%, following a 1.9% decline in July.

Import prices have now decreased for five consecutive months on an annual basis.

Low inflation, the lowest unemployment rate for nearly half a century and about $ 1.27 trillion in personal savings support consumer spending. Even as the economy slowed down, layoffs remained weak.

Last month, auto sales accelerated 1.8% after a slight rise of 0.1% in July. Sales at building and gardening equipment stores jumped 1.4%, their highest level since January.

On-line and mail order retail sales increased 1.6% following a 1.7% gain in July. Revenue from health and personal care stores increased 0.7%, reflecting the sharp rise in health sector inflation in August. Americans also spent more in hobby stores, musical instruments and bookstores, increasing sales by 0.9%.

Gas station receipts declined 0.9%, reflecting cheaper gasoline. But there were pockets of weakness in sales. Revenues from clothing stores declined 0.9% last month and sales at electronics and appliance stores remained unchanged.

Furniture sales dropped 0.5%, the largest decline in eight months. Americans have also cut spending on restaurants and bars, with sales down 1.2%, its highest level since September 2018.