Retail sales are up 0.5 percent, their biggest gain in three months – but consumer sentiment is at a three-decade low.
Seth Perlman / AP
American consumers stepped up their spending at retail stores by 0.5 percent in July, a sign of modest momentum in the economy that offered some relief after a harrowing week for stock prices.
That was the best gain in retail sales in three months. Although the news doesn't erase worries that the country could slip back into recession, it joins other signs that run contrary to the climate of fear that has gripped investors in recent days. The economy added about 117,000 jobs in July, for example, and in the past week claims for new unemployment benefits dipped below the symbolically important 400,000 level.
The retail news was offset by another US indicator: An early-August survey of consumer sentiment by Thomson Reuters/University of Michigan fell sharply, hitting its lowest level since 1980. That reflected a weak job market, high gasoline prices, and concern about government policies after a wrenching partisan debate on the US debt ceiling.
The plunge in sentiment – from an index level of 63.7 to 54.9 in just one month – surprised economists. But investors have already been focused on such economic headwinds in recent days. The July retail report was a reminder that consumers may have more staying power than pessimistic forecasters allow.
Chris Christopher, an economist at IHS Global Insight, says personal spending adjusted for inflation should increase at a 1.6 percent annual rate in the third quarter, not a stellar pace but far better than the second quarter's 0.1 percent rise.
"There is one silver lining in all that is happening in recent weeks – world oil prices are down significantly, and this will offer some relief to a very fatigued American consumer," he writes in a report on the retail numbers.
Given the recent market volatility and the decline in stock prices, Mr. Christopher also predicts that many consumers will put renewed focus on setting aside savings – one factor contributing to the cautious outlook for third-quarter spending gains.
Already, over the past year, consumer spending increases have centered largely on necessities like gas and food. Spending on some other categories – appliances, furniture, hobbies, and electronics – has been virtually flat over that time.
Consumer spending is an important indicator, because it accounts for roughly two-thirds of the US economy. But a range of forces could influence the outlook for consumers and businesses in coming weeks, including a possible new round of monetary easing from the Federal Reserve and whether Europe tips toward a financial crisis or not.
One comforting sign, in addition to the retail news, is that corporations have been reporting generally strong profits, a vital ingredient for hiring and investing.