U.S. Retail Sales Projected to Rise 0.2% in August Despite Economic Headwinds

In August, the U.S. economy faced a series of challenges, including a slowdown in hiring, an increase in the unemployment rate, and a resurgence in inflation. Despite these headwinds, consumer spending is expected to remain resilient, potentially serving as a bright spot in an otherwise lackluster economic landscape. According to FactSet's consensus estimates, U.S. retail sales for August are projected to rise by 0.2% on a month-over-month basis. When excluding automobiles and gasoline, core retail sales are anticipated to increase by 0.4%, indicating that a decline in automobile sales may be dragging down overall performance.

Economists note that while overall consumer activity, particularly in retail sales, has not significantly accelerated, it has also not shown substantial signs of slowing down. High-income households are playing a crucial role in maintaining spending levels, supported by record-high stock market gains and surging home prices, which have boosted household wealth. This financial cushion is enabling consumers to continue spending despite economic uncertainties.

The labor market has shown signs of weakness, with the unemployment rate rising to 4.3% in August, the highest level since 2021. Summer hiring has been sluggish, and June saw a net loss of 12,000 jobs. Recent revisions to employment data for 2024 indicate that the number of new jobs created between March 2023 and March 2024 was nearly 100,000 fewer than previously estimated, marking one of the largest adjustments in decades.

Despite the labor market's struggles, retail sales have maintained steady growth over the past year. Analysts from Glenmede highlight this trend as noteworthy, suggesting that U.S. consumers continue to exhibit strong spending resilience. This trend is expected to persist into August, with consumer spending remaining robust.

Data from U.S. bank credit and debit card transactions reveal that consumer spending in August increased by 0.4% month-over-month and by 1.7% year-over-year. Both high-income and low-income households are showing accelerated spending trends. Economists caution that the divergence between strong consumer spending and weak employment growth is unsustainable in the long term. The future economic trajectory will depend on which factor adjusts first: whether consumers reduce spending due to worsening employment and income prospects, or whether the labor market recovers to match the robust consumer performance. The prevailing view is that consumption will remain optimistic in the coming months.

Several corporate executives have expressed optimism about consumer resilience, noting that as long as businesses offer the right products or services, consumers are willing to spend. This sentiment is echoed by analysts who suggest that the upcoming holiday shopping season could be a critical test for consumer spending, as tariff-driven price increases may exacerbate household budget constraints. This dynamic will also be a key consideration for the Federal Reserve as it formulates monetary policy.

The upcoming retail sales data, set to be released before the Federal Reserve's September 16-17 FOMC meeting, will be a crucial indicator for market participants. The strength or weakness of retail sales will directly influence market expectations for the Fed's future policy direction. With a 96% probability of a 25 basis point rate cut this month, the retail sales figures will be closely scrutinized for any signs of economic resilience or vulnerability.