July's Resilient Retail Sales Spark Speculation About Fed Policy, Amazon Prime Day Effect: 3 Hot Takes From Economists

Consumer spending maintained its robust momentum in July, as indicated by the latest retail sales data.

Total sales grew by 0.7% month-on-month, the highest since January 2023, advancing from an upwardly revised 0.3% growth in June and sharply beating forecasts of 0.4%.

In annual terms, retail sales soared 3.2%, smashing expectations of 1.5%.

Strong Retail Sales Trim Recession Risks

Bill Adams, chief economist for Comerica Bank, highlighted that despite the housing market’s dip affecting durable goods spending, other categories witnessed strong performance.

“The solid increase in food service and drinking place sales is especially encouraging,” Adams pointed out, signaling consumers’ resilience amid challenges such as Canadian wildfire smoke and high temperatures.

Adams underscored this growth signaled the broader economic expansion, reinforcing the notion that the economy is set to continue its mid-year growth trajectory.

A solid retail sales report “will make the Fed less worried about recession risk and keep them focused on controlling inflation,” Adams noted.

Amazon Prime Day Boosts July Retail Sales

Jeffrey Roach, chief economist for LPL Financial, emphasized the impact of Amazon.com, Inc. AMZN Prime Day in elevating July’s retail sales figures. Roach highlighted the surge in electronic shopping, driven by online retailers, which saw its fastest monthly pace since December.

Roach pointed out the decline in auto sales revenue due to falling vehicle prices, which provided some relief to consumers.

While the data hinted at consumers’ depleting excess reserves and reliance on credit, Roach anticipated the Federal Reserve’s next policy meeting would likely be unaffected, given the steady trend in inflation.

Strong Retail Sales Act As Bad News For Markets

Quincy Krosby, chief global strategist for LPL Financial, highlighted the unforeseen market reaction to the strong July retail sales numbers.

As the 10-year Treasury yield surpassed 4.2%, expectations of over 4% GDP growth in the third quarter provided grounds for the hawkish faction within the FOMC to advocate for an additional rate hike.

Krosby emphasized the paradoxical situation of good news becoming bad news in this context.

The positive consumer spending data pushed up the cost of capital, potentially challenging small business owners and consumers. With rates rising, equity markets felt the pressure, leading to the realization that strong consumer performance had unsettling implications for financial markets.

Chart: U.S. Retail Sales