Recent economic data is offering some relief to those concerned about the strength of the US economy, which has been under pressure from persistently high interest rates. July’s retail sales and unemployment benefits reports reveal a more optimistic picture, suggesting that the economy may be on a path to moderation rather than contraction.
Retail sales in July showed the most significant increase since early 2023, indicating that the American consumer remains resilient. The breadth of this growth across multiple categories underscores the ongoing willingness of consumers to spend, even as they face higher prices and borrowing costs. Additionally, the latest figures show that initial claims for unemployment benefits fell to their lowest level since early July, alleviating some concerns raised by a previous jobs report that hinted at potential labor market weakness.
This positive news arrives on the heels of Walmart Inc.’s upbeat sales forecast, which, as a bellwether of economic health, suggests that while consumers are becoming more selective in their spending, they are still actively participating in the economy. Lydia Boussour, a senior economist at EY, noted, “Consumers are exercising greater caution with their spending as they navigate higher costs, but the latest retail sales figures demonstrate their continued resilience.” She added that while spending may become more prudent in the coming quarters, a significant pullback in consumer activity is unlikely.
Following these reports, the S&P 500 and Treasury yields saw gains, reflecting investor confidence that the Federal Reserve may begin lowering interest rates in the near future as inflationary pressures continue to subside.
However, other sectors of the economy are still feeling the strain of high borrowing costs. Confidence among US homebuilders fell for the fourth consecutive month in August, reaching its lowest point this year due to the challenges posed by elevated loan rates and home prices. Furthermore, the Federal Reserve reported a 0.6% decline in industrial output in July, the most substantial drop since the start of the year, partly due to disruptions from Hurricane Beryl affecting Gulf Coast refinery operations.
The manufacturing sector, which represents a significant portion of industrial production, remains under pressure as the Fed maintains interest rates at their highest levels in two decades. Surveys of factory activity have been less optimistic, with reports showing that manufacturing in New York has contracted for nine straight months, and the Philadelphia Fed region saw its first contraction since January.
In the retail sector, 10 out of 13 categories reported increases in July. Notably, auto sales rebounded after a cyberattack had caused a significant dip in June. The electronics and appliances sectors also posted strong gains, while e-commerce sales grew modestly, potentially influenced by heavy discounting during Amazon’s Prime Day and similar promotions from Walmart and Target.
This data portrays a consumer base that is holding steady, even as the economic environment becomes more challenging. With pandemic-era savings largely depleted and wage growth slowing, many Americans are increasingly relying on credit to support their spending, raising concerns about the sustainability of this trend, particularly as delinquency rates begin to rise.
“The July retail sales data align with our expectations for a soft landing,” economists at Bank of America commented. “The decrease in jobless claims further supports our view that a robust labor market continues to underpin consumer spending.”
While the economy faces headwinds, particularly in the manufacturing and housing sectors, the resilience of the US consumer and labor market offers some reassurance that a severe downturn may be avoided.
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