Gasoline price drop weighs on U.S. retail sales; consumer spending resilient




 

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. retail sales were unexpectedly unchanged in July as falling gasoline prices weighed on receipts at service stations, but consumer spending appeared to be holding up, further assuaging fears the economy was in recession.

Declining gasoline prices, however, freed up money for spending on other goods including furniture, electronics and appliances as well as building materials and garden equipment. Combined with strong wage gains from a tight labor market and ample savings, that should help to underpin consumer spending in the months ahead.

The mixed report from the Commerce Department on Wednesday is unlikely to sway the Federal Reserve from its aggressive monetary policy tightening path.

"The U.S. economy is not currently in recession," said Cliff Hodge, chief investment officer at Cornerstone Wealth in Charlotte, North Carolina. "Consumers remain resilient in the face of sticky inflation."

Last month's flat reading in retail sales followed a downwardly revised 0.8% increase in June. Retail sales in June were previously reported to have advanced 1.0%.

Economists polled by Reuters had forecast that sales would gain 0.1%, with estimates ranging from as low as a 0.3% decline to as high as a 0.9% increase.

Retail sales are mostly goods and are not adjusted for inflation. They rose 10.3% on a year-on-year basis in July.

Monthly consumer prices were unchanged in July as gasoline prices retreated from record highs, lowering the annual rate of increase in inflation to 8.5% from 9.1% in June.

The national average gasoline price dropped to about $4.27 per gallon in the last week of July after hitting an all-time high just above $5.00 in mid-June, according to data from motorist advocacy group AAA. Prices at the pump were averaging $3.943 per gallon on Wednesday.

Sales at service stations dropped 1.8% last month, while receipts at auto dealerships declined 1.6%. Excluding gasoline and motor vehicles, retail sales rose 0.7%.

There were also decreases in sales at clothing and general merchandise stores, which could reflect deep discounts as retailers try to clear excess inventory. Walmart said on Tuesday that the retail bellwether had cleared most of its summer seasonal inventory, but still had work to do in reducing its stock of electronics, home goods and apparel.

STRONG ONLINE SALES

Online and mail-order retail sales jumped 2.7% in July. Receipts at furniture stores gained 0.2%, while sales at building material and garden equipment retailers rebounded 1.5%. Sales at electronics and appliance stores increased 0.4%.

Spending at hobby, musical instrument and book stores edged up 0.1%. Receipts at bars and restaurants, the only services category in the retail sales report, climbed 0.1%.

Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.8% last month after rising 0.7% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have risen 0.8% in June.

"The increase in underlying retail sales is consistent with a rebound in real consumption at the beginning of the third quarter," said Michael Pearce, a senior U.S. economist at Capital Economics in New York.

Consumer spending grew at its slowest pace in two years in the second quarter. The modest rise was offset by weakness in business and government spending as well as residential investment, resulting in the second straight quarter of GDP contraction. But with the labor market maintaining a brisk pace of job growth in July and industrial production hitting a record high, the economy is probably not in recession.

Still, the Fed's aggressive interest rate increases to dampen demand and curb inflation have left the economy vulnerable to a downturn. The U.S. central bank has hiked its policy rate by 225 basis points since March.

Core retail sales are holding up even as spending is shifting back to services like restaurants, recreation and air travel as Americans learn to live with the COVID-19 pandemic.

(Reporting by Lucia Mutikani; Editing by Mark Porter and Paul Simao)

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