U.S. retail sales recorded their smallest gain in six months in August as consumers cut back on purchases of motor vehicles and clothing, but upward revisions to July data kept intact expectations of strong economic growth in the third quarter.
Other data on Friday showed the biggest drop in import prices in more than 1-1/2 years in August amid a decline in the cost of fuels and a range of other goods. The weak import price data came on the heels of soft inflation readings in August.
Signs of cooling consumer spending and inflation did not change views that the Federal Reserve will raise interest rates later this month. The U.S. central bank has increased borrowing costs twice this year.
“The seas are calm for the economy with enough wind in the sales to keep the expansion on track and not enough inflation pressures out there to halt the economy’s forward progress,” said Chris Rupkey, chief economist at MUFG in New York.
The Commerce Department said retail sales edged up 0.1 per cent last month, the smallest rise since February. Data for July was revised higher to show sales rising 0.7 per cent instead of the previously reported 0.5 per cent gain.
Economists polled by Reuters had forecast retail sales increasing 0.4 per cent in August. Retail sales in August advanced 6.6 per cent from a year ago.
Excluding automobiles, gasoline, building materials and food services, retail sales nudged up 0.1 per cent last month after an upwardly revised 0.8 per cent jump in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Core retail sales were previously reported to have increased 0.5 per cent in July. Despite the slowdown in core retail sales in August, consumer spending remains supported by a tightening labor market, which is steadily pushing up wages.
Annual wage growth increased at its fastest pace in more than nine years in August and there were a record 6.9 million job openings in July. Spending is also being underpinned by tax cuts and higher savings.
“Consumer spending will continue to increase at a sturdy pace through the rest of this year and into 2019, supporting overall economic growth,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh.
The dollar rose against a basket of currencies. U.S. Treasury prices fell, pushing the yield on the benchmark 10-year note above 3 per cent. Stocks on Wall Street were mostly flat.
WEAK AUTO SALES
The economy is poised for strong growth in the third quarter and this year, but an escalating trade war between the United States and China is casting a shadow on the long-term outlook.
President Donald Trump last week threatened duties on another $267 billion worth of Chinese goods on top of a $200 billion tariff list that is awaiting his decision. Washington already has slapped duties on $50 billion worth of Chinese imports, provoking retaliation from Beijing.
The economy grew at a 4.2 per cent annualized rate in the April-June period, the fastest in nearly four years and almost double the 2.2 per cent pace set in the first quarter. Growth estimates for the third quarter top a 3.0 per cent rate.
The predictions for solid economic growth were boosted by a report from the Fed on Friday showing industrial production increased 0.4 per cent in August after a similar gain in July.
Industrial production was powered by an acceleration in the output of motor vehicles, utilities and mining.
“One downside risk is tariffs on imported goods that would raise prices for U.S. consumers and lead them to be more cautious in their spending,” said PNC’s Faucher.
Auto sales fell 0.8 per cent in August after slipping 0.1 per cent in July. Receipts at service stations surged 1.7 per cent, likely reflecting gasoline prices, which have risen by about 32 cents per gallon this year according to data from the U.S. Energy Information Administration.
Sales at clothing stores fell 1.7 per cent, the biggest drop since February 2017, after accelerating 2.2 per cent in July. The plunge in clothing store receipts likely reflects a sharp drop in apparel prices in August, which was the biggest since 1949.
Sales at furniture stores fell 0.3 per cent and receipts at building material stores were unchanged last month.
But there were increases in online and mail-order retail sales and Americans also spent a bit more at restaurants and bars. Spending at hobby, musical instrument and book stores rose after declining for several months.
In a separate report on Friday, the Labor Department said import prices fell 0.6 per cent in August, the largest decline since January 2016, after slipping 0.1 per cent in July.
The drop in import prices likely reflects a strong dollar, which has gained more than 6 per cent this year against the currencies of the United States’ main trade partners.
In the 12 months through August, import prices rose 3.7 per cent, slowing after surging 4.9 per cent in July.
Prices for goods imported from China slipped 0.1 per cent in August for a second straight month. Prices for Chinese imports gained 0.2 per cent in the 12 months through August.
“This signals a slightly smaller inflationary impact from abroad on domestic prices going forward,” said Jake McRobie, a U.S. economist at Oxford Economics in New York.