US retail sales beat expectations as Americans pay more for gasoline

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales increased more than expected in August as a surge in gasoline prices boosted receipts at service stations, but the trend in underlying spending on goods slowed as Americans grappled with higher inflation and borrowing costs.

The report from the Commerce Department on Thursday also showed spending on goods in July was not as robust as initially thought. The data, however, did not change expectations for solid growth in overall consumer spending this quarter amid evidence of splurging on services like concerts, movies and sporting events.

The economy's underlying strength was reinforced by another report from the Labor Department showing new applications for unemployment benefits rising slightly last week. The data raised the odds of the economy avoiding a recession, and likely have no impact on near-term monetary policy, with the Federal Reserve expected to keep interest rates unchanged next Wednesday.

"There is nothing in today's reports to prompt a Fed rates response next week, even though the labor market remains out of balance," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The economy is in a good place for now with moderate consumer demand that is not hot enough to bring inflation back to life."

Retail sales rose 0.6% last month. Data for July was revised lower to show sales advancing 0.5% instead of the previously reported 0.7%. Economists polled by Reuters had forecast retail sales gaining 0.2%. Retail sales are mostly goods and are not adjusted for inflation. They rose 2.5% on a year-on-year basis.

Receipts at gasoline stations soared 5.2% after gaining 0.1% in July. Gasoline prices accelerated in August, peaking at $3.984 per gallon in the third week of the month, the highest this year, according to data from the U.S. Energy Information Administration. That compared to $3.676 per gallon during the same period in July.

Excluding gasoline stations, retail sales rose 0.2%.

Higher gasoline prices boosted producer inflation in August, a separate report from the Labor Department showed. But underlying inflation is moderating.

Portfolio management fees increased at a slower pace after vaulting in July and the rise in airline fares did not match the surge reported in August's consumer price data. These are among components feeding into the personal consumption expenditures price index, excluding energy and food, one of the inflation measures tracked by the U.S. central bank for monetary policy

Economists estimated that the so-called core PCE price index rose 0.1% in August, which would be smallest gain in 13 months, after increasing 0.2% in July. That would lower the year-on-year increase to 3.8%, falling below 4.0% for the first time since September 2021, from 4.2% in July.

"Further moderation in core PCE will be encouraging for Fed officials," said Veronica Clark, an economist at Citigroup in New York.

The value of sales at motor dealerships increased 0.3%. Online sales were unchanged after accelerating 1.5% in July. Amazon's Prime Day promotion in July, which was the biggest on record, and parents starting their back-to-school shopping early, likely pulled forward some spending from August.

Receipts at furniture stores dropped 1.0%. But electronics and appliance store sales rose 0.7%. Clothing store sales increased 0.9%. Receipts at building material and garden equipment supplies dealers gained 0.1%.

But consumers slashed spending on sporting goods, hobbies, books and musical instruments. Grocery store sales rose as did receipts at department stores. Sales at food services and drinking places, the only services category in the retail sales report, rose 0.3% after increasing 0.8% in July. Economists view dining out as a key indicator of household finances.

Stocks on Wall Street rose. The dollar gained versus a basket of currencies. U.S. Treasury prices were mixed.

DIMMING OUTLOOK

Though spending remains supported by higher wages from the tight labor market, the outlook is darkening. Excess savings accumulated during the COVID-19 pandemic continue to be run down. Credit card balances have risen sharply, with delinquencies at an 11-year high in the second quarter, according to recent data from the New York Federal Reserve.

Millions of Americans resume payments on student loans in October. Goldman Sachs estimates that the resumption of payments in full would be equal to roughly $70 billion, or around 0.3% of disposable personal income.

"We estimate that the stock of excess savings that has kept the consumers afloat has declined about 70% to $600 billion on aggregate and that excess savings for lower-income families have largely been depleted," said Lydia Boussour, senior economist at

EY-Parthenon in New York.

Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1% in August. Data for July was revised down to show these so-called core retail sales up 0.7% instead of the previously reported 1.0%.

Core retail sales correspond most closely with the consumer spending component of GDP. Despite August's tepid core sales and the downward revision to July's data, strong spending on services is expected, which should lift consumption.

"Third-quarter personal consumption is still poised to support strong quarterly growth, considering the healthy July increase and the general consumer demand shift from goods to services that mostly don't show up in retail sales," said Will Compernolle, macro strategist at FHN Financial in New York.

Gross domestic product growth estimates for the third quarter are currently as high as a 4.9% annualized rate. The economy grew at a 2.1% pace in the April-June quarter. It continues to forge ahead despite the Fed hiking its benchmark overnight interest rate by 525 basis points since March 2022 to the current 5.25%-5.50% range.

A third report from the Labor Department showed initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 220,000 for the week ended Sept. 9. The number of people receiving benefits after an initial week of aid, a proxy for hiring, rose 4,000 to 1.688 million during the week ending Sept. 2.

"The claims data are a reminder that the job market remains relatively tight," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)