Retail in July remained strong, but confidence declined; uncertainty still exists in the outlook for American consumers

In July, U.S. retail sales experienced broad growth, with June data revised upward, indicating a positive start for consumer spending in the third quarter. However, with the labor market slowing and consumer confidence weakening, economists remain cautious about the sustainability of this trend.

Data released by the U.S. Department of Commerce on Friday showed that July's seasonally adjusted retail sales rose 0.5% month-on-month, exceeding market expectations, while June's data was revised to a 0.9% increase. Excluding automobiles, sales increased by 0.3%. Out of 13 major retail categories, 9 reported growth, with auto sales recording the largest increase since March. Online retail and general merchandise store sales also performed well, benefiting from Amazon's extended Prime Day event, Walmart's week-long "Savings Week," and similar promotions from Target.

Analysts pointed out that this report suggests a stronger start for U.S. consumer spending in the second half of the year, following a period of consumer hesitation due to uncertainties stemming from President Trump's tariff policies. Despite signs of a cooling labor market, the relative clarity of trade policies and a rebound in the stock market have boosted consumer confidence for some.

However, the latest data from the University of Michigan showed an unexpected decline in consumer confidence in early August, reflecting concerns about the sustainability of the strong momentum in retail sales. According to Wells Fargo economist Shannon Seery Grein, "Given the uncertainty surrounding tariffs and recent employment data, we believe the likelihood of consumer spending softening in the second half of the year is higher."

Federal Reserve officials are closely monitoring consumer spending trends, as consumer spending accounts for two-thirds of U.S. economic activity. Although the Fed has kept interest rates unchanged this year to observe the impact of tariffs on prices, some policymakers are leaning towards resuming rate cuts in the coming months to support employment and economic growth.

The July retail sales report also indicated that the "control group" sales used to calculate GDP (excluding food services, auto dealers, building material stores, and gas stations) increased by 0.5%, with June data revised upward. Some categories that saw significant growth, such as furniture, sporting goods, and automobiles, also experienced price increases, suggesting that the rise in sales may partially reflect inflationary effects.

Sales at restaurants and bars fell month-on-month in July, marking the largest decline since February of this year. TD Securities Chief U.S. Macro Strategist Oscar Munoz noted that this is not a good sign for discretionary services spending at the beginning of the third quarter, stating, "Service spending is a core indicator of U.S. consumer health, so while July retail data performed reasonably well, it is not sufficient to reflect the overall consumption health."

Retail sales data primarily reflects goods consumption, accounting for about one-third of total consumer spending. Data on inflation-adjusted spending on goods and services for July will be released later this month.

Some economists commented that July's retail sales benefited from strong online shopping and auto sales, but consumers cut back on dining and beverage spending, indicating that households are shifting their spending towards necessities in the face of slowing growth in disposable income, reducing consumption of non-essential items Inflation data shows that in July, the extent to which companies passed on tariff costs to consumers was lower than expected, but wholesale profit margins rose significantly, suggesting that Americans may feel the impact of tariffs more directly in the future. Other data indicates that the cost of imported consumer goods recorded the largest increase since early 2024 in July, with notable price increases in clothing, footwear, and household goods. Meanwhile, U.S. industrial production declined in July, with weak manufacturing output