WASHINGTON — U.S. retail sales unexpectedly fell 0.6 percent in July, the Commerce Department said Friday, an about-face from June's 0.2 percent gain that suggests the tax-refund-driven spending burst of the second quarter has run its course.
The drop, a day after the Bureau of Labor Statistics reported that producer prices were unchanged in July, trimmed Wall Street's residual bet on a Federal Reserve rate increase at the Sept. 15-16 meeting. Interest-rate futures cut the implied odds of a hike to 32.4 percent from 40.6 percent before Thursday's wholesale-price release, pricing a roughly 67.6 percent chance that a divided Federal Open Market Committee holds its benchmark range at 3.5 percent to 3.75 percent.
What shifted
Total seasonally adjusted retail and food-services sales reached $763.6 billion in July, down from a revised $768.1 billion in June, the Census Bureau reported. Economists polled by Reuters had expected a 0.1 percent gain, with forecasts ranging from a 0.5 percent decline to a 0.7 percent rise. Core retail sales — which exclude autos, gasoline, building materials and food services — fell 0.4 percent after a revised 0.4 percent June increase, missing forecasts for a 0.3 percent gain.
Motor vehicle and parts dealers posted the steepest monthly drop at 1.8 percent. Nonstore retailers, the category that captures online shopping, fell 2.2 percent, a decline economists attributed to Amazon's decision to pull its Prime Day promotion into an earlier month. Gasoline stations were down 0.9 percent as pump prices eased from June's Iran-conflict highs. Clothing and accessories stores rose 1.9 percent and restaurants and bars edged up 0.5 percent, the only meaningful gains in the report. Total sales were 5.0 percent higher than a year earlier, and 6.3 percent higher over the May-through-July period. The Census Bureau flagged a sampling-error margin of plus or minus 0.4 percentage points on the July advance estimate.
The PPI side
The Producer Price Index for final demand was flat in July, the BLS said Thursday, and rose 4.7 percent from a year earlier, down from 5.5 percent in June, below the 4.9 percent forecast and the lowest annual reading since March. Final-demand goods prices fell 0.7 percent on lower energy costs, service prices rose 0.2 percent and construction costs surged 2.2 percent. Weekly jobless claims released the same morning rose modestly but stayed consistent with a firm labor market.
Combined with Wednesday's consumer-price report, which cooled the annual inflation rate to 3.4 percent, and last Friday's payrolls print showing 23,000 jobs lost in July, the data handed Fed officials a coherent story of easing prices and softening demand a month before their meeting.
On the Street
PNC Financial analysts wrote Friday that households are showing "increasing sensitivity to rising gasoline prices," creating what they described as a "challenging backdrop for second-half spending." Even so, PNC said it remained difficult to envision a scenario in which consumer spending truly rolls over, citing rising household wealth from stock-market gains. The S&P 500 is up 14 percent year-to-date, an increase the firm said is enabling upper-income and older households to keep spending.
The dissent
Cleveland Fed President Beth Hammack, who cast the lone dissent at the July FOMC meeting in favor of a quarter-point increase, said Thursday that one hike would not be enough. Hammack said "one 25 basis point move probably doesn't do a whole lot for the economy," arguing the current 3.5 percent to 3.75 percent range is not meaningfully restraining growth. "When I'm talking to businesses, I'm not hearing that they're sensing any restraint from investments in growth based on where interest rates are," she said.
Hammack said multiple increases would be needed to bring the Fed's preferred core Personal Consumption Expenditures gauge, at 3.3 percent as of June, down to the 2 percent target, and warned that delay would make the job progressively harder. She likened the desired approach to "pumping the brakes before a stop sign to glide to a stop" rather than slamming them. Despite the July payroll drop, Hammack said the 4.1 percent unemployment rate keeps the labor market near full employment.
The next retail sales report, covering August, is scheduled for release on Sept. 16 — the second day of the FOMC meeting.