LDN - Business

Solid U.S. retail sales calm some worries about economy

[September 14, 2019] By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales increased more than expected in August, pointing to solid consumer spending that should continue to support a moderate pace of economic growth.

The report from the Commerce Department on Friday could further allay financial market concerns of a recession, which have been fueled by a year-long trade war between the United States and China as well as slowing global growth.

Still, the Federal Reserve is expected to cut interest rates again next Wednesday to blunt some of the hit from the trade tensions on the longest economic expansion in history.

Fed Chair Jerome Powell said last week he was not forecasting or expecting a recession, but reiterated the U.S. central bank would continue to act "as appropriate" to keep the expansion, now in its 11th year, on track. The Fed lowered borrowing costs in July for the first time since 2008.

"The winds of recession aren't coming closer to shore if the consumer continues to buy their hearts out," said Chris Rupkey, chief economist at MUFG. "Fed officials are unlikely to cut rates too much deeper as they seek to get out in front of the risks the economy faces acting early instead of being too late."

Retail sales rose 0.4% last month, lifted by spending on motor vehicles, building materials, healthcare and hobbies. Data for August was revised slightly up to show retail sales increasing 0.8% instead of 0.7% as previously reported.

Economists polled by Reuters had forecast retail sales would gain 0.2% in August. Compared to August last year, retail sales advanced 4.1%. Retail sales have increased for six straight months, the longest such stretch since June 2017.

But with the Trump administration this month slapping a 15% tariff on Chinese consumer goods such as televisions, apparel, bed linens, smart watches and footwear, there are concerns retail sales could pull back. Economists and retail groups expect businesses will pass on the duties to consumers, thereby raising prices for the targeted goods.

"It is too early to assess the impact of the new tariffs that took effect at the beginning of this month, but they do present downside risks to household spending," said Jack Kleinhenz, chief economist for the National Retail Federation in Washington.

Households' worries about the new round of tariffs were also underscored by a small rise in consumer sentiment early this month. The University of Michigan said its survey of consumers found that concerns about the impact of tariffs on the economy rose in early September.

Excluding automobiles, gasoline, building materials and food services, retail sales climbed 0.3% last month after increasing by a slightly downwardly revised 0.9% in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have jumped 1.0% in July.

Consumer spending, which accounts for more than two-thirds of the economy, increased at a 4.7% annualized rate in the second quarter, the most in 4-1/2 years.

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Shoppers carry bags of purchased merchandise at the King of Prussia Mall, United States' largest retail shopping space, in King of Prussia, Pennsylvania, U.S., December 8, 2018. REUTERS/Mark Makela

Economists expect consumer spending will slow to just below a 4.0% rate in the third quarter, which would be more than enough to keep the economy growing at a steady pace, rather than tipping into recession as signaled by financial markets.

The dollar <.DXY> was little changed against a basket of currencies, while U.S. Treasury prices fell. Major U.S. stock indexes were largely unchanged.

GROWTH LOCOMOTIVE

"The trend in consumer spending growth still looks very solid," said Michael Feroli, an economist at JPMorgan in New York. "Consumers remain the locomotive of the economy."

Strong consumer spending is encouraging retailers to boost inventory. A second report from the Commerce Department on Friday showed business inventories increased 0.4% in July after being unchanged in June. Stocks at retailers rebounded 0.8%, the most in six months, after falling 0.2% in June.

The inventory increase bodes well for GDP growth this quarter. The Atlanta Fed is forecasting the economy to grow at a 1.8% rate in the third quarter. The economy grew at a 2.0% rate in the April-June quarter, down from the first quarter's brisk 3.1% pace.

Financial markets have fully priced in a rate cut at the Fed's Sept. 17-18 policy meeting. Most economists expect additional monetary policy easing in October and December. While underlying consumer prices have accelerated in the past three months, inflation is likely to remain benign.

In a fourth report on Friday, the Labor Department said import prices dropped 0.5% last month amid declines in the cost of petroleum products and food. In the 12 months through August, import prices decreased 2.0% after dropping 1.9% in July.

Import prices have now declined for five straight months on an annual basis.

Low inflation, the lowest unemployment rate in nearly half a century and about $1.27 trillion in personal savings are underpinning consumer spending. Even as the economy has been slowing, layoffs have remained low.

Last month, auto sales accelerated 1.8% after edging up 0.1% in July. Sales at building material and gardening equipment stores jumped 1.4%, the most since January.

Online and mail-order retail sales increased 1.6% after shooting up 1.7% in July. Receipts at health and personal care stores rose 0.7%, mirroring a jump in healthcare inflation in August. Americans also spent more at hobby, musical instrument and book stores, boosting sales 0.9%.

Receipts at service stations fell 0.9%, reflecting cheaper gasoline. But there were pockets of weakness in sales. Receipts at clothing stores fell 0.9% last month and sales at electronics and appliance stores were unchanged.

Furniture sales dropped 0.5%, the largest decrease in eight months. Americans also cut back on spending at restaurants and bars, with sales declining 1.2%, the most since September 2018.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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