Strong US retail sales ease gloom over economy

Strong US retail sales ease gloom over economy

U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, helping to assuage financial market fears that the economy was heading into recession.

FILE PHOTO: Clothes are seen on display inside the Barneys New York the luxury department store in
FILE PHOTO: Clothes are seen on display inside the Barneys New York the luxury department store in New York, U.S., July 31, 2019. REUTERS/Shannon Stapleton/File Photo

WASHINGTON: U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, helping to assuage financial market fears that the economy was heading into recession.

The upbeat report from the Commerce Department on Thursday, however, will likely not change expectations that the Federal Reserve will cut interest rates again next month as news from the manufacturing sector remains dour, underscoring the darkening outlook for the economy against the backdrop of trade tensions and slowing growth overseas.

President Donald Trump cheered the strong retail sales data, which came a day after a key part of the U.S. Treasury yield curve inverted for the first time since June 2007 and triggered a stock market sell-off. An inverted Treasury yield curve is historically a reliable predictor of looming recessions.

Trump's "America First" policies, which have led the United States into a bitter trade war with China, have been blamed for threatening to derail the longest U.S. economic expansion in history and unleash a global recession.

"The United States is now, by far, the Biggest, Strongest and Most Powerful Economy in the World, it is not even close!" Trump wrote on Twitter. "As others falter, we will only get stronger. Consumers are in the best shape ever, plenty of cash."

Financial markets have fully priced in a 25-basis-point rate cut at the U.S. central bank's Sept. 17-18 policy meeting. The Fed lowered its short-term interest rate by a quarter of a percentage point last month, citing the acrimonious U.S.-China trade fight and slowing global economies.

But the data could push markets to dial back expectations of a 50-basis-point rate cut next month.

"So yes, consumers are lifting economic growth and easing pressure on the Federal Reserve to cut more aggressively, but the trade war itself, and the rhetoric that accompanies it will push for more rate cuts," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Retail sales increased 0.7per cent last month after gaining 0.3per cent in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3per cent in July. Compared to July last year, retail sales increased 3.4per cent.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 1.0per cent last month after advancing by 0.7per cent in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Solid retail sales were reinforced by strong second-quarter results from Walmart Inc . The world's largest retailer posted a 20-quarter, or five-year, streak of U.S. growth, unmatched by any other retail chain, and raised its earnings forecasts for the year.

U.S. stocks were trading largely higher after Wednesday's sharp losses. The dollar edged up against a basket of currencies. U.S. Treasury prices rose, with the yield curve steepening a little after Wednesday's inversion.

STRONG LABOR MARKET

July's gain in core retail sales suggested strong consumer spending early in the third quarter, though the pace will likely slow from the April-June quarter's robust 4.3per cent annualized rate. Consumer spending, which accounts for more than two-thirds of the economy, is being underpinned by the lowest unemployment rate in nearly half a century.

While a separate report from the Labor Department on Thursday showed an increase in the number of Americans filing applications for unemployment benefits last week, the trend in claims continued to point to a strong labor market.

Solid consumer spending is blunting some of the hit on the economy from the downturn in manufacturing, which is underscored by weak business investment. There are, however, red flags for the labor market coming from manufacturing.

The sector's struggles were highlighted by a third report from the Fed on Thursday showing factory production dropped 0.4per cent in July. Output at factories has declined more than 1.5per cent since December 2018. Manufacturing, which makes up about 12per cent of the economy, is also being weighed down by an inventory overhang, especially in the automotive sector.

The troubles appear to have continued into the third quarter. Though a report from the Philadelphia Fed on Thursday showed factory activity in the mid-Atlantic region slowed moderately in August amid an increase in new orders, manufacturers reported hiring fewer workers and slashing hours.

A measure of factory employment dropped to its lowest level since November 2016. The weakness in factory employment in the region that covers eastern Pennsylvania, southern New Jersey and Delaware was mirrored by another survey from the New York Fed. Activity in New York state was little changed this month, with employment measures deteriorating further.

"The health of factories is still an important driver of growth and the soft patch for production remains a factor that is keeping economic growth in the slow lane," said Chris Rupkey, chief economist at MUFG in New York.

Manufacturing productivity tumbled at its fastest pace in nearly two years in the second quarter, with factories cutting hours for workers, another report from the Labor Department showed.

The economy grew at a 2.1per cent rate in the second quarter, decelerating from the first quarter's 3.1per cent pace. Growth estimates for the third quarter range from a 1.5per cent pace to a 2.1per cent rate.

In July, auto sales fell 0.6per cent after rising 0.3per cent in June. Receipts at service stations rebounded 1.8per cent, reflecting higher gasoline prices. Online and mail-order retail sales jumped 2.8per cent, the most in six months, after rising 1.9per cent in June. They were likely boosted by Amazon.com Inc's Prime Day event.

There were increases in sales at clothing, furniture and building material stores. Sales at restaurants and bars accelerated 1.1per cent. But spending at hobby, musical instrument and book stores dropped 1.1per cent last month.

"The consumer is incredibly resilient," said Lindsey Piegza, chief economist at Stifel in Chicago. "But without growth from housing investment and manufacturing, the consumer will be hard-pressed to continue to alone support the U.S. economy."

(Reporting by Lucia Mutikani; Additional reporting by Pete Schroeder in Washington; Editing by Paul Simao)

Source: Reuters

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