WASHINGTON — Americans increased their spending at retail stores last month, the most in a year and a half, easing fears that the economy is weakening under pressure from higher prices and high interest rates.
The Commerce Department said Thursday that retail sales jumped 1% from June to July, the biggest gain since January 2023, after falling slightly the previous month. Auto dealers, electronics and appliance stores and grocery stores all reported strong sales gains.
Retail sales figures for July provided reassurance that the U.S. economy, while slowed by pressure from high interest rates, remains resilient. They showed that American consumers, the main driver of economic growth, are still willing to spend.
The prospect of a still-growing economy is likely to be promoted by Vice President Kamala Harris’ presidential campaign, which is preparing to roll out measures Friday to ban “price gouging” on food items. On Wednesday, her opponent, former President Donald Trump, criticized the Biden-Harris administration’s economic record, despite grossly inflating increases in food prices and mortgage payments.
Other economic data released Thursday was also mostly positive, including a report on initial jobless claims. The numbers show that companies are mostly retaining employees and not increasing layoffs.
With Americans spending more, economists at Morgan Stanley raised their growth forecast for the July-September quarter to 2.3% at an annual rate, from a previous estimate of 2.1%. The economy expanded at a brisk 2.8% in the April-June quarter.
Overall, the latest data are consistent with an economy heading toward a “soft landing,” in which the Federal Reserve raises interest rates enough to cool inflation but not enough to trigger a recession.
“The continued resilience of consumer spending should ease recession fears and reduce the likelihood that markets will price in a larger (half-point) cut” at the Fed’s mid-September meeting, said Michael Pearce, an economist at Oxford Economics. Instead, economists increasingly expect the Fed to begin cutting interest rates next month, with a modest quarter-point reduction in its benchmark rate, which affects many consumer and business loans.
Adjusted for inflation, sales rose about 0.8% last month. And excluding gas station sales, which don’t reflect Americans’ appetite for spending, retail purchases also rose 1%.
Since the pandemic, consumers have been hit hard by rising prices and interest rates. Yet at the same time, average wages have risen, allowing many households to continue spending.
Inflation-adjusted wages have increased slightly from last year. High-income households have also seen their wealth rise, with stock prices and home values surging over the past three years. Rising wealth can encourage more spending.
Auto sales jumped 3.6% last month, the biggest gain since January 2023. That was a rebound from the previous month, when a cyberattack involving many dealerships slowed sales.
Sales at electronics and appliance stores jumped 1.6%. They rose 0.9% at hardware and garden stores. Sales at restaurants rose 0.3%, a sign that Americans are still willing to spend on discretionary items, such as dining out.
Financial markets fell earlier this month on concerns about the economy after the government reported that hiring was much weaker than expected in July and the unemployment rate rose for a fourth straight month.
But since then, economic reports show that layoffs remain low and that service sector activity and hiring remain strong. Americans also continue to spend lavishly on services such as travel, entertainment and health care, which are not included in Thursday’s retail sales report.
Still, some economists worry that the bulk of Americans’ spending is now fueled by increased use of credit cards. And the proportion of Americans falling behind on their credit cards, while relatively small, is growing.
But slowing inflation could give households a much-needed boost. Consumer prices rose just 2.9% in July from a year earlier, the government said Wednesday. That was the weakest year-on-year inflation reading since March 2021. And core inflation, which strips out volatile food and energy costs, fell for the fourth straight month.
Americans are still willing to spend, but they are increasingly looking for deals. On Thursday, Walmart, the country’s largest retailer, reported strong sales for the quarter ended July 31.
Americans appear to be increasingly shopping at discount stores like Walmart. The company also raised its sales forecast for this year and said it has seen no signs of consumer weakness.
Other companies are also starting to offer lower prices to attract consumers, a trend that is helping to slow inflation. McDonald’s said its global same-store sales fell for the first time in nearly four years in the second quarter. The company launched a $5 meal deal at U.S. restaurants in June; most franchisees plan to extend the offer through August.
Evan Louey-Dacus, who lives in New York and works in corporate event planning, said that because many food prices remain high, he has shifted his spending to discount grocery stores.
“When inflation started to hit food prices hard,” says Louey-Dacus, 22, “my tastes changed. Instead of having a lot of potatoes or vegetables, I started buying a lot of rice. Instead of having a lot of eggs, I started buying cold cuts or I started shopping more locally.”
Louey-Dacus also buys used items at thrift stores and gravitates toward open-box items, which are items that have already been purchased. Her latest purchase: an open-box laptop at Best Buy, which was marked down from about $750 to $600.
Arie Kotler, CEO of Arko Corp., a Richmond, Virginia-based convenience store chain, said he’s noticed consumers have cut back on non-essential items like salty snacks and candy bars since May. He thinks people are struggling with high interest rates on credit cards, many of which are maxed out.
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AP Business writers Anne D’Innocenzio in New York and Dee-Ann Durbin in Detroit contributed to this report.
