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US economy gains momentum with July retail sales at 7-month high

Consumers boosted purchases of motor vehicles and lifted discretionary spending in July

Photo: Reuters

A shopper pushes a trolley in a supermarket in London, Britain. Photo: Reuters

Reuters Washington

US retail sales recorded their biggest increase in seven months in July as consumers boosted purchases of motor vehicles and lifted discretionary spending, suggesting the economy continued to gain momentum early in the third quarter.

Retail sales for June and May also were revised higher, which should help to assuage concerns about consumer spending, But persistently sluggish wage growth has pushed Americans to dip into their savings to fund spending. Economists say wage growth has to pick up to sustain consumer spending.

"American shoppers flocked to the malls and even department stores in July, suggesting consumers are well-positioned to propel the economy forward in the second half of the year," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

 

The Commerce Department said on Tuesday that retail sales jumped 0.6 per cent last month, the largest gain since December 2016. June's retail sales were revised to show a 0.3 per cent gain instead of the previously reported 0.2 per cent drop.

Economists had forecast retail sales increasing 0.4 per cent in July. May's retail sales were revised to show no change instead of the previously reported 0.1 per cent dip. Retail sales increased 4.2 per cent in July on a year-on-year basis.

Excluding automobiles, gasoline, building materials and food services, retail sales surged 0.6 per cent last month after an upwardly revised 0.1 per cent gain in June. These so-called core retail sales, which correspond most closely with the consumer spending component of the gross domestic product (GDP), were previously reported to have dipped 0.1 per cent in June.

Prices of US Treasuries extended losses after the data while the dollar gained against a basket of currencies. US stock index futures were trading higher.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 2.8 per cent annualised rate in the second quarter. That boosted GDP growth to a 2.6 per cent rate in the April-June period.

The acceleration in consumer spending in the second quarter came at the expense of savings, a trend that economists say is unsustainable. Annual wage growth has struggled to break above 2.5 per cent.

Low savings a concern

The saving rate has dropped to 3.8 per cent in the second quarter of this year from a rate of 6.2 per cent in the second quarter of 2015. Low savings and tepid wage growth suggest households would need to borrow to maintain spending.

"The decline in the saving rate, however, raises some longer-term concerns about consumer spending," said Michael Feroli, an economist at JPMorgan in New York. "Savings can't drop indefinitely and future consumption growth will need to rely on stronger income growth."

Motor vehicle sales climbed 1.2 per cent in July, the biggest rise since December 2016, after advancing 0.9 per cent in June. Faced with a huge inventory of unsold cars, auto dealerships are resorting to hefty discounts to attract buyers.

Prices for new motor vehicles recorded their biggest drop in nearly eight years in July and have decreased for six straight months. Prices could decline further as a separate report from the Labor Department on Tuesday showed the cost of imported motor vehicles fell in July for the second consecutive month.

Retail sales in July were also buoyed by a 1.2 per cent jump in receipts at building material stores. That followed a 1.1 per cent increase in June. Sales at online retailers vaulted 1.3 per cent in July, the largest gain since December 2016, likely buoyed by Amazon.com's Prime Day promotion.

Sales at restaurants and bars rose 0.3 per cent. Receipts at sporting goods and hobby stores also increased 0.3 per cent.

But sales at electronics and appliance stores slipped 0.5 per cent last month. Sales at clothing stores fell 0.2 per cent after rising 0.7 per cent in June. Clothing retailers are struggling with falling traffic in shopping malls and increased competition from Amazon and other online retailers.

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First Published: Aug 15 2017 | 7:32 PM IST

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