Americans spent a bit more at retailers last month, providing a small boost to the economy just as the Federal Reserve considers how much to cut its key interest rate.
Retail sales ticked up 0.1% from July to August, after jumping the most in a year and a half the previous month, the Commerce Department said Tuesday. Online retailers, sporting goods stores, and home and garden stores all reported higher sales.
The data indicate that consumers are still able and willing to spend more despite the cumulative impact of three years of excess inflation and the higher interest rates intended to combat those rising prices. Average paychecks, particularly for lower-income Americans, have also risen sharply since the pandemic, which has allowed many Americans to continue spending even as many necessities became more expensive.
The impact of inflation and consumers’ health has been an ongoing issue in the presidential campaign, with former President Donald Trump blaming the Biden-Harris administration for the post-pandemic jump in prices. Vice President Kamala Harris has, in turn, charged that Trump’s claim that he will slap 10% to 20% tariffs on all imports would amount to a “Trump tax” that will raise prices further.
A slowdown in hiring and a recent rise in the unemployment rate have fueled concerns the economy is sputtering, yet steady spending should boost growth. The Federal Reserve’s Atlanta branch estimates that the economy grew at a solid 2.5% annual rate in the third quarter.
“With consumption still very healthy, for now, recession fears appear overblown,” Olivia Cross, North America economist at Capital Economics, said.
Fed rate cuts a big question
The Fed could provide a further boost to consumers and the economy by lowering borrowing costs. It is likely to reduce its key rate at its meetings in November and December as well as Wednesday. Such cuts should, over time, lower rates for mortgages, auto loans, and credit cards. Average mortgage rates have already fallen in anticipation of the Fed’s actions.
Consumers have been showing signs of stress, with credit-card debt rising and savings rates falling.
Sales jumped 1.4% for online retailers in August and rose 0.7% at health and personal care outlets. Yet they were flat for restaurants and bars, a sign that consumers are holding back from some discretionary spending.
Gas stations reported a 1.2% drop in sales, which mostly reflected a decline in prices last month. Auto sales also ticked lower.
On Wednesday, Fed policymakers will decide whether to cut their key interest rate by a typical quarter-point or a larger-than-usual half-point, from its current level of about 5.3%, a 23-year high.
Wall Street is increasingly expecting a reduction of a half-point. With inflation headed back to the Fed’s 2% target, many economists also argue that the central bank does not need to keep rates that high. At the same time, some Fed policymakers who worry that inflation could remain stuck at its current level of 2.5% may not want to cut rates that fast. They could point to solid retail sales as evidence that there is no need to rush rate cuts.
One reason inflation has fallen from a four-decade high of 9.1% in June 2022 has been consumers’ reluctance to pay some of the higher prices they’ve encountered at grocery stores, restaurants, and clothing stores. Instead, shoppers have traded down to store brands, sought out deals or spent more at discount retailers. Some packaged food makers, fast-food restaurants, and retailers such as Target have responded by cutting prices or offering deals to entice shoppers.
