While robust July retail sales numbers might come as a surprise given the various pressures on American consumers, the data was very well in line with our forecasts ahead of the Thursday data release from the Commerce Department. Further disinflation and 15 consecutive months of positive real wage growth have been the key tailwinds for spending despite the increasing growth concerns.
Retail sales of all items were up 1% in July, much higher than the consensus of 0.4%, while more aligned with our forecast of 0.8%.
In more detail, auto sales were the main driver of total sales in July, up 3.6%. We expect sales of automobiles and other big-ticket items to continue to perform better as financing costs ease further. Excluding the volatile components, the control group which feeds into gross domestic product calculations grew 0.3%, consistent with our forecast that will remain a key driver for growth in the third quarter. Overall, the increase in sales was broad-based, with 10 out of 13 categories posting increases, the highest number in recent months.
In a separate report from the Labor Department, initial jobless claims and continuing claims both came out lower than expected, keeping both at a healthy distance from our recession threshold. New claims were down to 227,000 from 234,000 earlier, while continuing claims fell for the first time in four weeks, down to 1.864 million.
So far, most of the key economic data following the July jobs report has proven that the market did overreact to some of the weaknesses in job gains and unemployment. The calls for a 50-basis-point cut from the Federal Reserve in September and subsequent cuts in November or December look much less reasonable now given how strong the economy has been. That makes the bar for a supersized rate cut in September higher, in our opinion.
Unless we see job gains falling to between no gain and 50,000 in August or the unemployment rate continues to increase to 4.4% or more, the Federal Reserve will likely cut its policy rate by only 25 basis points in September.
The data should add some good reasons to expect the forecast for GDP growth in the third quarter to increase. The Atlanta Fed’s forecast for the third quarter was 2.9% before the data release.
Read the latest issue of RSM’s The Real Economy for Chief Economist Joe Brusuelas’s take on the need for rate cuts that prioritize growth.
