US retail sales rise in July, but softening job market clouds outlook

US retail sales rose solidly in July, buoyed by strong demand for motor vehicles and aggressive promotions from major retailers, even as concerns over a weakening labour market and inflationary pressures tempered optimism about consumer spending in the months ahead. Commerce Department data released on August 15 showed retail sales increased 0.5 per cent last month, following an upwardly revised 0.9 per cent gain in June. Excluding automobiles, sales climbed 0.3 per cent. On an annual basis, sales were up 3.9 per cent. Nine of 13 major categories recorded increases, led by autos, online shopping, and general merchandise stores.

Motor vehicle sales advanced 1.6 per cent, supported by a rush to purchase battery-powered electric vehicles before the expiration of federal tax credits at the end of September. Online sales rose 0.8 per cent as Amazon, Walmart, and Target rolled out extended discount events, luring inflation-conscious households with deals on back-to-school goods, electronics, and apparel. Furniture and sporting goods sales also posted gains, partly reflecting higher prices linked to tariffs.

Mixed picture for consumers

Despite the headline gains, economists warned the outlook for consumer spending is becoming more fragile. The University of Michigan’s survey showed consumer sentiment fell in early August, with views on purchasing durable goods slipping to a one-year low. Inflation expectations also edged up, with households now anticipating prices to rise 4.9 per cent over the next year, compared with 4.5 per cent in July.

Notably, some categories weakened. Spending at restaurants and bars, often seen as a proxy for household financial confidence, fell 0.4 per cent, the sharpest drop since February. Sales at building materials and electronics stores also declined.

Fed faces policy crossroads

The stronger retail sales data eased fears of a sharp economic slowdown, but inflationary risks complicate the Federal Reserve’s next steps. Consumer spending accounts for nearly two-thirds of US economic activity, making the figures closely watched by policymakers. Some economists argue the resilience in spending undermines the case for a sharp rate cut in September.

Still, with payroll growth weakening and import prices rising amid new tariffs, the Fed faces pressure to strike a balance between supporting demand and containing inflation. Import prices for consumer goods excluding autos climbed 0.4 per cent in July, signalling exporters are not absorbing tariff costs as the administration had suggested.

Stocks on Wall Street were mostly lower following the report, while Treasury yields rose and the dollar slipped against a basket of currencies.

Overall, July’s report suggests a decent start for consumer spending in the third quarter. But with households facing a softer job market, higher borrowing costs, and renewed tariff pressures, economists caution that the durability of US consumer strength will be tested in the months ahead.

(With inputs from agencies)