In July, U.S. consumer spending data showed that the economy continues to demonstrate resilience despite a slowing job market, high interest rates, and elevated prices, raising concerns about the sustainability of consumption growth.
On Thursday, August 15th, the U.S. Commerce Department reported that consumer spending in July performed better than expected due to increasing signs of inflation pressure easing.
Based on unadjusted data, retail sales in the U.S. unexpectedly surged in July, with a strong 1% increase compared to the previous month, surpassing economists’ expectations of 0.3%.
Car sales saw the highest growth, possibly related to a rebound after car dealerships repaired software systems following cyberattacks. Car sales in July soared by 3.6%. Excluding car and gas expenses, retail sales in July increased by a robust 0.4% compared to June, surpassing the 0.1% forecast.
Spending on electronic products also maintained strong growth, increasing by 1.6% and 1% respectively. Consumer spending at bars and restaurants in the U.S. continued to grow healthily, with food and beverage sales up by 0.9%. Meanwhile, grocery retailers plummeted by 2.5%, gas station revenues only grew by 0.1%, and clothing stores declined by 0.1%.
This latest show of strength by the U.S. economy comes amidst multiple economic hurdles pressing on American consumers.
Oren Klachkin, an economist at Nationwide Financial Markets, told CNN that the economy is showing encouraging trends, moving towards a more normal state and soft landing.
Following the release of the data on Thursday morning, stock market futures surged significantly, and U.S. Treasury yields also saw an increase.
According to data released on Wednesday, the consumer price index in July fell below 3%, marking the first time in over three years, a significant drop from the 40-year high of 9.1% set in June 2022.
Although inflation figures remain above the Federal Reserve’s 2% target, data indicates that the price pressures that peaked two years ago continue to ease. Financial markets expect the Fed to cut interest rates for the first time at their September meeting, but resilient consumers may provide policymakers with more reasons to adopt a cautious rate reduction approach.
So far, the U.S. economy has demonstrated extraordinary resilience amid various economic challenges squeezing American consumers, however, some cracks have appeared. The most significant and concerning issue currently is the future of the job market, a key driver of the economy. Besides seeking lower interest rates, investors are increasingly looking for the Fed to shift its focus from inflation to broader concerns about the labor market and other potentially weakened conditions.
The July employment report fell short of expectations, raising concerns about a potential weakening in the labor market. The unemployment rate recently climbed to its highest level since October 2021, after lingering below the ultra-low 4% level for over two years. Economists told CNN that once the unemployment rate starts to rise, it tends to gain momentum and continue to increase.
On Thursday, initial jobless claims in the U.S. dropped for the second consecutive week to the lowest level since early July, potentially alleviating worries about further deterioration in the labor market.
As of the week ending August 10th, initial jobless claims stood at 227,000, a decrease of 7,000 from the previous week, lower than the expected 235,000.
Other economic data released on Thursday showed unstable manufacturing conditions. The Empire State Manufacturing Index from the New York Federal Reserve slightly improved but remained in negative territory at -4.7, slightly better than the expected -6. Meanwhile, the Philadelphia Federal Reserve Manufacturing Index declined to -7, marking its first negative value since January and well below the expected 7.9.
The consumer spending report on Thursday also indicated a phenomenon where consumers are holding their ground in the face of rising borrowing costs, a cooling labor market, and uncertain economic prospects.
With pandemic savings essentially depleted, wage growth cooling off, many Americans are increasingly resorting to credit cards and other loans to support their shopping habits, raising doubts about the sustainability of consumer spending.
Earlier on Thursday, Walmart reported a 4.2% increase in U.S. store sales for the second quarter, with an 8.5% growth in quarterly revenue. Online sales grew by 22%, and the company raised its sales expectations for the year, noting that shoppers are becoming more discerning and seeking value. Walmart’s comparable sales exceeded analysts’ expectations in the latest quarter, with CFO John David Rainey stating that the company has not seen any gradual deterioration in customers’ financial health.
Walmart’s latest earnings report emphasized that in an environment of economic uncertainty and high interest rates, American consumers are becoming more selective in their discretionary purchases. Americans are also cutting back on travel and delaying large-scale home renovations. Retailers from Home Depot to Wayfair Inc. are signaling a soft consumer environment.
Even affluent shoppers are tightening their belts. Luxury conglomerates LVMH, Dior, and Fendi reported a mere 1% growth in sales for the most recent quarter compared to the same period last year, as revenues and profits for the budget year’s first half declined.
Economists Estelle Ou and Eliza Winger from Bloomberg stated that “consumer spending continues to lag compared to previous years. Looking ahead, we expect consumers to continue to restrain spending on non-essentials.”
“Right now, the only places people are shopping are Amazon, Walmart, and Costco,” said Michael Baker, an analyst at DA Davidson, to CNN. “Walmart has done well in focusing on value propositions. Affordable quality has become more important. Structurally, they are in a favorable position.”
(References: CNBC, Bloomberg, and CNN reports)