Retail sales were up a robust 0.6% m/m in July, well ahead of consensus expectations for a 0.3% gain. The tally in June was also revised up, from a previously reported decline of 0.2% to an increase of 0.3%.
Excluding autos and gas, sales were up 0.5% in the month, atop a revised 0.3% gain in June (previously reported at -0.2%).
The ‘control group’ (excluding gas, autos, building materials, and food services) was also up 0.6% the month, with June revised up to +0.1% (from -0.1% previously).
By category, the biggest gains were in miscellaneous (+1.8%), non-store retailers (+1.3%), building materials (+1.2%), and departments stores (+1.0%). There were declines in electronics (-0.5%), gasoline stations (-0.4%), and clothing (-0.2%).
Key Implications
Given the headline print and the positive revisions, this report is much better than expected and suggests that the consumer is in much better shape heading into the third quarter of the year. This strong showing should be enough to push economic growth to around 3% (annualized) in the third quarter and implies somewhat stronger growth in the second quarter as well.
With continued job growth and gradually accelerating wages, there is good reason to expect consumers to continue to lead the economic outlook in the months ahead.
For the Federal Reserve, continued strength in real activity is balanced by ongoing weakness in inflation. This suggests a cautious approach to normalizing policy. The fed funds rate target is likely to remain steady in September, even as the Fed announces its plans to normalize its balance sheet. Today’s strong report raises the odds of at least one more rate hike this year, likely in December.
