US Retail Sales Beat Expectations as Consumers Continue to Open Their Wallets

U.S. retailers continued to prove their resilience in July, beating expectations for sales with a big boost from online sales and Amazon Prime Day.

Consumers spent $696.4 billion on goods during the month, a 0.7% increase from the previous month and a 3.2% gain from a year ago, the Census Bureau reported on Tuesday.

Economists had expected a 0.4% month-over-month rise, according to consensus estimates gathered by FactSet.

July's sales follow a solid report in June, which totaled $689.5 billion for the month and marked a 0.3% increase from May, which was revised upward from its original release.

The figures show consumers are still spending at a healthy pace despite ongoing economic uncertainty. Consumer confidence has been rising as inflation continues to retreat and the labor market, though cooling, remains strong.

The U.S. economy added 187,000 jobs in July, and the unemployment rate is at a historically low level of 3.5%.

July's retail sales got a big boost from Amazon Prime Day, where consumers spent $12.7 billion in two days. The report showed a 1.9% jump in spending at online retailers overall.

Sales at sporting goods and hobby stores rose 1.5% and food service and drinking places rose 1.4%.

Despite a rise in gasoline prices, gasoline sales rose only 0.4% over the month, reflecting lower demand. Consumers also pulled back at furniture stores, where sales dropped 1.8% and electronics and appliance stores, where they fell 1.3%.

Economists, many of whom expected lower retail sales in July, say consumers still face a series of challenges, including ongoing inflation.

“Rapid wage increases continue to boost consumer spending power, helping to extend the expansion but also raising the specter of lingering inflation,” Nationwide Senior Economist Ben Ayers wrote. “The momentum for consumers will eventually run out of steam but this will require a significant loosening of labor conditions, a process which has played out much more slowly than expected this year.”

The pressures were evident at Home Depot, which reported a 2% year-over-year sales decline on Tuesday. The bellwether retailer reported fiscal second-quarter net income of $4.66 billion, down from $5.17 billion a year earlier. Revenue for the quarter fell to $42.92 billion from $43.79 billion during the same quarter last year.

Policymakers at the Federal Reserve have been trying to cool the economy, and with it, the labor market, in their fight to curb inflation. The central bank has raised rates 11 times since March 2022, to a 22-year high of 5.25% to 5.5%. Despite its efforts to slow economic activity, growth remained vibrant at 2% in the second quarter.

Retail sales are an important economic indicator since consumer spending makes up about two-thirds of the nation's economic output.

Unlike many other government numbers, the retail figures are not adjusted for inflation, which is currently running at 3%, according to the latest reading on the consumer price index. It has dropped precipitously since peaking at over 9% in June 2022.

"The better-than-expected retail sales growth in July is another sign that the economy continues to grow at an impressive pace," said Sam Millette, fixed-income Strategist for Commonwealth Financial Network in Waltham, MA. "The continued strength of the consumer to start the second half of the year is a good sign for the health of the economy and a recession remains unlikely as long as consumers keep spending."