Weak U.S. Retail Sales and Inflation Data Dim Prospects for Fed Rate Hike, Reports Reuters

By Lucia Mutikani

WASHINGTON – U.S. retail sales unexpectedly remained unchanged in July as Americans reduced discretionary spending, indicating a moderation in consumption that may dampen expectations for a significant economic rebound in the third quarter.

Additionally, data released indicated that producer prices experienced their largest decline in nearly a year during July, driven by decreasing costs for services and energy goods. The combination of softening consumer spending and subdued inflation suggests that the Federal Reserve is unlikely to increase interest rates in the near term, despite maintaining a robust labor market.

"Fed members are hesitant to take decisive action until economic growth shows sustainable solid footing and inflation approaches their target. Today’s reports do not provide any comfort that will happen soon," said Joel Naroff, chief economist at Naroff Economic Advisors.

The steady retail sales report for July followed an upward revision of a 0.8 percent increase in June. Previously, June sales were estimated to have risen by 0.6 percent, with July sales up 2.3 percent compared to the same month last year.

Motor vehicle sales saw a 1.1 percent rise last month, suggesting that increased demand for cars is diverting consumer spending away from discretionary goods, with sales of sporting goods experiencing their steepest decline since January 2015.

When excluding automobiles, gasoline, building supplies, and food services, retail sales also remained flat after a 0.5 percent rise in June. These so-called core retail sales reflect the consumer spending component of gross domestic product most closely.

Economists had predicted an overall retail sales increase of 0.4 percent and core sales growth of 0.3 percent for July. However, some analysts cautioned against overinterpreting the July results, citing a labor market nearing full employment while expressing expectations for a sales rebound in August.

"It is surprising that spending would be weak given two months of strong job growth. I will hold off on declaring July retail figures as more than just random fluctuations until we see revisions," remarked Steve Blitz, chief economist at M Science.

Following the data release, U.S. Treasuries saw an uptick in trading, while the dollar depreciated against a range of currencies. U.S. stock markets remained relatively stable, with rising oil prices counterbalancing the weak data.

Online sales surged again last month as they continued to capture market share from traditional retailers. In a bid to revitalize its business after six consecutive quarters of declining sales, Macy’s announced plans to close an additional 100 stores, citing fierce competition from online platforms.

"The rise of online retail is impacting the broader economy, contributing to declines in the construction of shopping centers and other commercial properties," noted Michael Feroli, an economist at JPMorgan. "Fortunately, commercial construction has never been a significant portion of business spending, so the overall impact on GDP is fairly limited."

PRICE PRESSURES REMAIN LOW

In another report, the Labor Department revealed that its producer price index for final demand fell by 0.4 percent in July—the first drop since March and the largest since September 2015. This followed a 0.5 percent increase in June.

Over the past year, the PPI experienced a 0.2 percent decline, marking the most significant drop since December 2015 and succeeding a 0.3 percent rise in the previous year.

A strong dollar and declining oil prices have kept inflation subdued, remaining persistently below the Federal Reserve’s 2 percent target. Fed officials have voiced ongoing concerns regarding low inflation levels.

The central bank raised its benchmark overnight interest rate last December for the first time in nearly a decade. However, a recent survey found that while most economists expect another rate adjustment in December, financial markets are anticipating such a move not happening until next year.

Following the July data release, a futures market indicated only a 43 percent likelihood of a December interest rate hike, down from 47 percent prior to the data.

Robust consumer spending has helped offset the economic impact of inventory adjustments and the prolonged effects of decreasing oil prices, which have constrained GDP growth to an average annualized rate of 1.0 percent over the last three quarters.

Despite indications of cooling consumer spending after the strong 4.2 percent growth in the previous quarter, economists continued to predict consumption growth surpassing 2.5 percent in the current quarter, supported by solid labor market gains and rising home and stock values. The economy added a total of 547,000 jobs in June and July.

Another report highlighted stable consumer sentiment in early August, although households’ perceptions of income experienced modest declines, particularly among younger demographics citing higher-than-expected expenses, as per the University of Michigan’s preliminary consumer sentiment survey. Rising rents and healthcare costs have been notable concerns for American households.

In light of the retail sales figures, the Atlanta Federal Reserve adjusted its third-quarter GDP growth estimate down by two-tenths of a percentage point to a rate of 3.5 percent, with anticipated growth driven by a rebound in inventory investment and consumer spending.

A further report from the Commerce Department indicated that businesses made significant strides in reducing inventory build-up in June, with the inventory-to-sales ratio declining to a seven-month low of 1.39 months.