Retail Sales Review-Will it impact the Fed tomorrow?

The August retail sales report, released this morning, is the final major economic data point for the Federal Reserve as it heads into its two-day meeting to decide on interest rate policy. The report showed a modest increase in retail sales, rising 0.1% month-over-month, which defied expectations of a 0.2% decline. This slight uptick demonstrates the resilience of U.S. consumers despite ongoing concerns about the broader economy. With the Federal Reserve closely watching this data as part of its decision-making process, today’s report could play a role in shaping the size of the expected rate cut.

Breaking down the components, sales excluding auto and gas rose by 0.2%, falling slightly short of expectations for a 0.3% increase. The control group, which factors out volatile categories and is used in GDP calculations, rose by 0.3%, matching analyst forecasts. Notably, non-store retailers, such as Amazon, showed a strong 1.4% increase, indicating robust online sales activity. In contrast, sectors like furniture saw a 0.7% decline, while food services and drinking places remained flat, which could suggest some softening in discretionary spending.

One of the key factors that impacted the overall retail sales figure was the decline in gasoline prices, which saw a 1.2% drop in sales at gas stations. This pullback in gas prices helped bring down the headline number but also provided consumers with extra disposable income to spend in other areas. Miscellaneous store retailers were among the strongest performers, with a 1.7% increase in sales, highlighting the varying performance across sectors within the report.

Despite the mixed nature of the report, it highlights the enduring strength of the U.S. consumer. August’s figures, though slightly below some forecasts, underscore the capacity of American households to maintain spending in the face of economic challenges. However, the fact that some key categories underperformed relative to expectations signals that consumer behavior may be moderating. This report also follows an upward revision to July’s data, which now shows a 1.1% increase, offering a more positive view of summer retail activity.

In terms of Federal Reserve policy, this report likely strengthens the case for a smaller 25 basis point rate cut. The data does not provide any alarming signals of economic distress that would justify a more aggressive 50 basis point cut. The balance of consumer strength and softening in some sectors reflects a delicate moment for policymakers.

In conclusion, the August retail sales report suggests that the Fed will lean toward a 25 basis point rate cut. The resilience in consumer spending, aided by falling gas prices and sustained demand in certain sectors, points to an economy still in reasonable health. However, the data lacks the decisive momentum that could push the Fed firmly toward a 50 basis point cut, leaving markets to continue debating the size of the upcoming rate move.