Retail sales in the U.S. remained flat in June, defying Wall Street's predictions of a decline, indicating a resilient consumer sector despite signs of a slowing economy. Economists had expected a 0.3% drop in spending, according to Bloomberg data. Instead, retail sales held steady, with May's sales also revised higher to a 0.3% increase from a previously reported 0.1%, as per Census Bureau data.
June sales, excluding auto and gas, rose by 0.8%, significantly above the consensus estimate of a 0.2% increase. The control group in Tuesday's release, which excludes several volatile categories and factors into the Gross Domestic Product (GDP) reading for the quarter, saw a 0.9% rise in June, surpassing estimates for a 0.2% increase.
"Although retail sales were unchanged in June, the strong 0.9% month-over-month rise in control group sales should ease concerns about the plight of the consumer in the wake of the renewed slump in sentiment," said Paul Ashworth, chief North America economist at Capital Economics. "Admittedly, both second-quarter consumption and GDP growth still appear to have been no better than 2% annualized, but the strong gain in June sets up for a better third-quarter performance."
The update on consumer spending comes amidst a cooling yet growing U.S. economy. Nonstore retailers led the gains by category, rising 1.9%. Conversely, gasoline stations saw a 3% decline in sales, and motor vehicle and parts dealers experienced a 2% drop.
The stronger-than-expected retail sales figures challenge the notion that the Federal Reserve will need to cut interest rates soon. Citi's senior global economist Robert Sockin commented, "This report shows that the consumer is holding in there well and is certainly not falling off a cliff. For the Fed, this will take some urgency off easing rates out of fears that the economy may be slowing down more sharply."
In an interview at the Economic Club of Washington, Federal Reserve Chair Jerome Powell declined to specify when the Fed might start its easing cycle. "I'm not going to be sending signals on any particular meeting," he said. "We are going to make these decisions meeting by meeting based on evolving data and the balance of risks."
The positive retail sales data had a noticeable impact on the markets. U.S. equity futures extended gains following the release, with S&P 500 contracts suggesting a gain of around 11 points and the Dow called up by 150 points. The Nasdaq was priced for a 35-point bump. Benchmark 10-year Treasury note yields rose five basis points to 4.212%, while two-year notes increased by 54 basis points to 4.463%.
David Russell, global head of market strategy at TradeStation, noted, "Recent data has focused on cooler economic data, but we didn't get that today. These retail sales confirm the broad potential for growth despite two years of hawkish policy. They also suggest investor sentiment could pivot away from secular growth stories like AI and toward traditional cyclical growth, especially with rate cuts looking more likely."
FedWatch by CME Group indicates the Fed will likely hold its benchmark rate steady at between 5.25% and 5.5% at its next policy meeting. The odds of a September rate cut are now pegged at around 87%.
Bret Kenwell, U.S. Investment Analyst at eToro, highlighted the significance of consumer spending. "More than two-thirds of the U.S. economy is driven by consumption, so to see a strong retail sales print is healthy - even if that causes some short-term volatility in the rate-cut outlook. It's far better to see the Fed eventually lower rates on falling inflation than to see the Fed cutting rates to bolster a weakened economy."
Powell emphasized the Fed's dual mandate of price stability and full employment, noting that cooling conditions in the labor market were bringing these objectives into better balance. He also downplayed the likelihood of a hard-landing scenario for the economy, suggesting that a soft economic landing - easing inflation without triggering a recession - remains a feasible outcome.
