American consumers continued to show a robust spending appetite in July as sales from retail and food services came in much hotter than expected.
Total sales rose 0.7% on the month, much higher than the 0.4% forecasted and was the fourth consecutive increase since April. The control group, which accounts for a sizable portion of the gross domestic product, posted an even larger surprise, growing 1% on a month-ago basis.
Given the modest gains in prices on the month, July’s retail sales should add a significant boost to GDP growth in the third quarter. Our tracking model points to an increase in GDP forecast from 1.8% to 2.1% after the release.
The Prime Day effect was a big driving factor for the robust gains in sales. Non-store sales grew 1.9%, the largest increase on the month, and contributed to nearly a half of the total gains in July.
The data reaffirmed our prediction that discounts would be one of the top driving factors for sales growth ahead and during the back-to-school season. The fact that goods prices actually dropped 0.3% in July, according to the consumer price index released last week, meant that consumers were taking advantage of lower prices to start shopping early.
That should raise some concerns over a potential sharp slowdown once the back-to-school season ends, similar to what happened ahead of the holiday seasons in the past two years. With inflation forecasted to pick up somewhat in the next couple of months due to higher energy prices, the spending momentum might ease prematurely.
Underneath the topline, strong gains also came from food and beverage sales in-store and at restaurants, rising 0.8% and 1.4%, respectively. While some of the gains came from a slight uptick in food prices, consumers did seem to enjoy their warmer than normal July outdoor much more.
Spending on back-to-school categories such as clothing, general merchandise and department stores posted sharp increases in July as expected.
However, electronics and furniture sales were a big drag on sales on the month, falling 1.3% and 1.8%, respectively.
American consumers remained resilient in July as price pressure from inflation continued to fade. With inflation becoming less of a concern despite some potential upticks, the probability of a soft landing has never been higher since the beginning of the Federal Reserve’s rate hike campaign.
Check out more economic insights for the middle market at RSMUS.com.