U.S. retail sales saw an unexpected increase last month

In August, U.S. retail sales showed resilience with a 0.1% increase, following an upwardly revised 1.1% surge in July. This unexpected rise indicates that the economy remained solid heading into the third quarter, defying expectations for a 0.2% decline.

Core retail sales, which exclude autos, gasoline, building materials, and food services, also rose by 0.3%, signaling robust consumer spending, a key driver of GDP growth.

Consumer spending accelerated in the second quarter, and this momentum appears to have carried into the third, with growth forecasts for Q3 estimated at around 2.5% annually, following a 3.0% growth pace in Q2. Despite previous rises in the unemployment rate, it dipped slightly to 4.2% in August, while layoffs remained low and wage gains steady, providing a strong foundation for consumer spending.

However, concerns persist about the declining personal saving rate, which fell to 2.9% in July, approaching levels not seen since 2008. Some economists warn that this could signal weaker future spending if labor market conditions worsen. Others, however, argue that household balance sheets remain healthy, bolstered by rising home and stock prices, with some income sources, such as those from undocumented workers, potentially not fully captured in official data.

As the Federal Reserve prepares for its policy meeting, most economists anticipate a modest 25 basis point rate cut. With the Fed’s benchmark rate currently in the 5.25%-5.50% range, the decision will balance signs of steady economic growth with potential risks, as inflationary pressures remain a key focus for policymakers.