Surprise jump in retail sales casts aside recession fears

Americans are still spending big - on cars, appliances and furniture - in a surprise burst of activity that’s propelling the U.S. economy and helping shake off fears of an impending downturn.

Retail sales rose 1 percent in July, reversing a June slowdown and marking the largest jump in more than two years, according to new Commerce Department data released Thursday. Car sales were particularly brisk, after a cyberattack disrupted purchases the previous month. But there were gains across the board at restaurants and bars, as well as stores that sell groceries, electronics, furniture and health goods.

Earlier in the day, Walmart, the country’s largest retailer, reported stronger-than-expected earnings and lifted its forecasts for the rest of the year, citing continued consumer resilience.

“Everybody’s trying to talk down the economy but pay attention to what people are doing: They are increasing their spending. " said Gus Faucher, chief economist at PNC Financial Services Group. “That’s an indication the economy remains solid.”

The upbeat reports, which came on the heels of an encouraging inflation snapshot this week, helped assuage investors’ fears of an imminent recession. Last week, the markets plunged on fears the economy was headed for a downturn following a dour July jobs report.

However, all three major stock market indexes ticked up Thursday morning on the strong retail sales, with the Dow Jones Industrial Average rising 330 points, or about 1 percent.

The U.S. economy has remained remarkably resilient, even as the Federal Reserve has hiked interest rates to decades-long highs. Those elevated borrowing costs have slowed key parts of the economy, such as housing and manufacturing, helping bring down inflation from a peak of 9.1 percent two summers ago to 2.9 percent in July. But there are also growing signs that a broader weakening may be taking hold, especially in the labor market. Wage growth and hiring have slowed, and the unemployment rate edged up to 4.3 percent in July, its highest level since 2021.

Still, mixed signals abound. More encouraging news Thursday showed a drop in the number of people filing weekly unemployment claims. The combination of a gradually slowing but still strong economy is likely to keep the Fed on track to begin cutting interest rates at its next meeting in September.

The economy’s resilience and easing inflation are hot topics in the presidential election with both Vice President Kamala Harris and former president Donald Trump laying out economic plans this week. Trump has doubled down on his plan to impose significant tariffs on imports, and Harris is expected to crack down “price gouging” in groceries.

Inflation has been a major pain point for Americans and has caused many to revamp their buying habits. Major companies including Home Depot, PepsiCo and Disney have recently warned that consumers are cutting back and trading down. Credit card delinquencies are rising, especially among low- and middle-income households, an indication of growing financial strain.

“Consumers are still spending, but they’re also being more selective,” said Diane Swonk, chief economist at KPMG. “They’re saying ‘I’ve had it with high prices’ and are making trade-offs where they can.”

Although Americans emerged from covid flush with extra cash, they have more than burned through that money. A new report from the Federal Reserve Bank of San Francisco shows that, despite a spike in liquid wealth in 2020, U.S. households are now in worse financial shape than they would’ve been if the covid crisis hadn’t happened.

Middle- and lower-income households, for example, had about 13 percent less in liquid wealth at the end of March than they would have if pre-pandemic trends had continued, bank researchers found, adding that there’s also been a “notable increase” in credit card delinquency rates as people draw down their savings.

“Smaller financial cushions and heightened credit stress … pose a risk to future consumer spending growth,” the report found.

Despite those headwinds, economic spending data has largely remained rosy, in part because the wealthiest Americans drive much of the country’s economic growth. Consumer spending makes up roughly 70 percent of the U.S. economy, and within that, the top 20 percent of households account for roughly 45 percent of overall spending, according to estimates from Morgan Stanley.

“Low- and middle-income households are feeling the brunt of high inflation, but the lion’s share of U.S. consumer spending comes from the wealthiest consumers,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “And they’re still out there, juicing the economy.”

That growing gap is evident at some of the country’s largest companies. Walmart’s improving sales, up 4.8 percent in the most recent quarter, was in large part because more high-income households were shopping at the discount retailer to save money.

Meanwhile, Disney this month attributed disappointing earnings to “a moderation in consumer demand,” but noted that while lower-income consumer are “feeling a little bit of stress,” wealthier ones are doubling down on international travel.

The Vacationeer, a Disney-focused travel agency in Florida, has seen a drop-off in demand for theme parks and other “land-based” entertainment, according to owner Jonathan de Araujo. But wealthy clients are continuing to book extravagant cruises, more than making up for the pullback among middle-income families.

“If I were only selling Disney World tickets, my sales would be down this year,” de Araujo said. “There’s no question that when you’re at the parks, it’s less busy than it was last summer or two summers ago. But it’s not like those sales have evaporated; there are plenty of people who are still spending.”

In Portland, Fulton House Bed & Breakfast is having a banner summer. But bookings for the rest of the year are few and far between, according to manager Kevin Waring.

“This summer has been great, things have really, really picked up,” he said. “But the rest of the year? I’m not sure. Maybe those bookings will come in a little later in the fall.”