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By Lucia Mutikani
WASHINGTON (Reuters) -U.S. retail sales increased solidly in July, supported by strong demand for motor vehicles as well as promotions by Amazon.com and Walmart, though a softening labor market and higher goods prices could curb consumer spending growth in the third quarter.
The rise last month together with an upward revision to June’s sales data eased some concerns that economic activity was stalling following weak employment growth over the past three months. The report from the Commerce Department and a survey from the University of Michigan on Friday showing consumers’ inflation expectations increased in August further dimmed the prospect of an oversized interest rate cut by the Federal Reserve next month.
U.S. Treasury Secretary Scott Bessent said on Thursday he thought a half-percentage-point rate cut from the U.S. central bank was possible given the soft employment numbers. But some economists doubted the Fed would even resume its policy easing cycle in September amid growing signs that inflation was poised to accelerate as businesses pass on higher costs from import duties to consumers.
“There is no data-based support here for a rate cut in September,” said Conrad DeQuadros, senior economic advisor at Brean Capital.
Retail sales rose 0.5% last month after an upwardly revised 0.9% gain in June, 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 increase 0.5% after a previously reported 0.6% rise in June.
Sales increased 3.9% on a year-over-year basis. Motor vehicles led the almost broad rise in sales, with receipts at auto dealerships advancing 1.6% after rising 1.4% in June. A rush to buy battery-powered electric vehicles ahead of the September 30 expiration of federal government tax credits helped to drive automobile sales in July, analysts at J.P. Morgan said.
Online sales rose 0.8% after increasing 0.9% in June. Amazon and Walmart held sales promotions last month to lure inflation-weary consumers with deep discounts, including on back-to-school essentials. Amazon extended its sales window to 96 hours, up from the typical 48, featuring aggressive promotions on categories ranging from apparel to electronics.
Clothing store sales rose 0.7%. Receipts at furniture outlets jumped 1.4%, while sales at sporting goods, hobby, musical instrument and book store sales rebounded 0.8%, both suggesting tariff-driven price increases rather than volumes.
But sales at building material and garden equipment retailers fell 1.0% while receipts at electronics and appliance stores dropped 0.6%. Households also pulled back on spending at restaurants and bars. Sales at food services and drinking places, the only services component in the report, fell 0.4% after rising 0.6% in June. Economists view dining out as a key indicator of household finances.
Financial markets currently expect a rate cut at the Fed’s September 16-17 meeting. The central bank left its benchmark overnight interest rate in the 4.25%-4.50% range last month for the fifth straight time since December.
Stocks on Wall Street were trading mostly lower. The dollar fell against a basket of currencies. U.S. Treasury yields rose.
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Retail sales excluding automobiles, gasoline, building materials and food services increased 0.5% after an upwardly revised 0.8% rise in June. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have gained 0.5% in June.
Adjusted for inflation, economists estimated that core retail sales increased 0.3% in July, marking a decent start to the third quarter. But downside risks to consumer spending are growing against the backdrop of the softening labor market as well as rising goods and services prices.
The University of Michigan’s Surveys of Consumers showed consumer sentiment weakened in August, with its measure of buying conditions for long-lasting manufactured goods slumping to a one-year low as concerns over purchasing power mounted.
“Underlying fundamentals are clearly softening,” said Lydia Boussour, senior economist at EY-Parthenon. “In the months ahead, the drag on consumer demand is expected to intensify, with demand destruction from higher tariffs likely to become more pronounced as consumers increasingly scale back discretionary purchases to cope with rising costs.”
Consumers’ 12-month inflation expectations increased to 4.9% this month from 4.5% in July. The increase occurred across all three political affiliations.
Expectations that inflation would pick up were reinforced by a separate report from the Labor Department’s Bureau of Labor Statistics that showed import prices increased 0.4% in July, boosted by a strong rise in the cost of consumer goods. That followed a 0.1% dip in June. Import prices exclude tariffs.
Prices for imported consumer goods excluding motor vehicles increased 0.4%. The higher reading suggested exporting nations are not cutting prices to offset the impact of higher costs from duties on U.S. companies and consumers, as has been suggested by the White House.
“Tariff evangelists in the Trump administration predict that import prices would fall after tariffs because exporters would cut their prices to defend export sales and market shares,” said Carl Weinberg, chief economist at High Frequency Economics. “We are not seeing what they are saying.”
Tariffs are constraining manufacturing activity. A report from the Fed showed factory output stalled in July.
“We expect this trend to continue over the coming months with risks tilted towards sharper weakening,” said Veronica Clark, an economist at Citigroup. “Tariffs, supply chain disruptions and shipping delays should weigh on activity broadly in the manufacturing sector. Of course, some pockets of manufacturing could benefit from tariffs.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)
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