First, the bottom line: Uncertainty may be heightened, but consumers are still spending
- Consumers have taken notice of the many challenges the economy is facing; weakening labor conditions, the inflationary impact of tariffs, changes to the tax code, and a reprioritization of fiscal policy are all among the catalysts defining the outlook.
- Against an uncertain backdrop, retailers posted surprisingly solid sales gains in August, signaling that consumers — despite their many concerns — aren’t yet ready to rein in spending.
By the numbers: August retail results easily top forecasts
- Retail sales surged by 0.6% in August, easily topping the consensus forecast of a much more muted 0.2% gain for the month.
- The upside surprise was accompanied by a modest upward revision to July’s gain, which also came in at 0.6% versus the 0.5% previously reported.
- Year-on-year, retail sales growth saw a lift to 5.0% — the best 12-month reading since April.
- Month-to-month readings have been volatile this year, as consumers have been buffeted by a sea change in fiscal policy and have taken steps to mitigate the impact of higher prices when possible. But changes in how consumers are spending haven’t translated to a reduction in how much consumers are spending.
- The strength of sales growth since June suggests strongly that the key engine for the economy hasn’t stalled. Consumers appear to still have fuel in the tank.
Broad thoughts: Consumer resiliency is again on display
- The economy isn’t firing on all cylinders, perhaps best evidenced by the ongoing decline in job openings and a sharp slowdown in the pace of hiring in recent months. Those developments have certainly been enough to raise some relevant questions about the near-term outlook and for a pivot in tone from Fed policymakers who are now expected to deliver a quarter-point interest rate cut tomorrow.
- Still, the recent resurgence in retail sales suggests that consumers — the critical lynchpin to the U.S. economy — may be cautious, but not to the point of battening down the hatches in anticipation of an imminent economic storm. That’s particularly noteworthy as households adjust to higher prices for a range of goods that have been impacted either directly or indirectly by tariffs.
- The relative strength of consumption growth doesn’t mean that consumers aren’t adjusting to the changing landscape. They are, as evidenced by an increased propensity to trade down, substituting lower-priced alternatives where possible and palatable — to stay within their spending budgets.
- By virtually any measure of the numbers, headline or core, August retail sales were solid. Gains were relatively broad-based across various sectors with limited exceptions.
- It’s worth noting that retail sales aren’t adjusted for inflation, so rising prices push top-line sales growth higher, all else being equal. Higher prices may have provided a boost but don’t appear likely to account for most of the gain. The better news is that consumers still appear to be able to absorb those higher costs without cutting back on spending altogether, even if it requires them to become more creatively budget-conscious for where and how they spend.
- The solid retail numbers are validated by other indicators that suggest that the economy has been on a solid growth trajectory in Q3 in real terms, accounting for the impact of inflation.
- That could change if labor conditions continue to deteriorate in the coming months if slower job creation ultimately transitions to higher layoffs. Consumers are likely to continue to spend if they feel secure in their employment situation; a surge in job losses could shake that confidence and cause consumers to hold their wallet a bit more tightly. It’s too soon to tell if last week’s unexpected increase in first-time jobless claims was an outlier or a more ominous precursor to a sustained increase in layoffs. Weekly jobless claims data will merit close monitoring in the coming weeks to gain greater clarity.
- For now, the consumer spending story remains constructive, with the potential to improve if labor conditions stabilize and reaccelerate.
- All attention now turns to tomorrow’s Fed announcement and, more importantly, context and insights into the current thinking of monetary policymakers. A quarter-point cut is all but baked in and won’t move the needle much at this point in terms of expectations or market response.
- More important is the updated Fed projections for growth, inflation, labor conditions, and interest rates set to be released concurrently with the rate announcement. Further color from Fed Chair Jay Powell should also provide greater clarity about what borrowers, investors, consumers, and businesses should expect for the path for interest rates over the duration of the year and into 2026.
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