U.S. retail sales unexpectedly fell in July, marking the first decline in nine months, as the impact of tax refunds waned and gasoline prices dropped. This slowdown in consumer spending at the beginning of the third quarter complicates the Federal Reserve's outlook on potentially raising interest rates.
The Commerce Department reported that retail sales decreased by 0.6% in July, following a revised 0.2% increase in June. This contraction was the largest in 14 months and the first since last October. Economists surveyed by Reuters had anticipated a slight increase of 0.1% for July.
The decline was influenced by several factors. A pull-forward of Amazon's Prime Day event from July to June, along with competing promotions from other retailers, may have shifted some spending into the previous month. Additionally, lower gasoline prices contributed to a 0.9% drop in receipts at service stations.
Sales at non-store retailers, which includes online sales, decreased by 2.2%. Receipts at motor vehicle and parts dealers also fell significantly, dropping 1.8%. Sales of electronics and appliances were down 0.5%. However, sales at clothing stores saw a rebound of 1.9%, likely due to back-to-school shopping.
The report's data on inflation-adjusted consumer spending, which excludes volatile categories like autos, gasoline, building materials, and food services, showed a 0.4% decrease. This figure, closely watched as a component of gross domestic product, had been forecast to rise 0.3% after a revised 0.4% increase in June.
These sales figures, coupled with recent unexpected job losses and modest inflation readings, have bolstered expectations in financial markets that the Federal Reserve will refrain from raising interest rates in September. Analysts suggest that without significant upward surprises in August's price and employment data, the central bank's Federal Open Market Committee is likely to remain patient.
Despite the July dip, overall retail sales were still up 5.0% year-on-year. Economists note that consumers are becoming more selective and price-sensitive. While generous tax refunds supported spending in the second quarter, those have largely been spent. However, a rally in the stock market has boosted household wealth, leading some economists to believe a sharp collapse in spending is unlikely. Data analysis indicates that higher-income and older households are leveraging wealth gains to sustain their spending habits.
The food services and drinking places category, a key indicator of household finances, showed continued growth, with receipts increasing 0.5% in July. Sales also increased at furniture, building material, garden equipment, and supplies stores, as well as miscellaneous retailers and health and personal care outlets.