Lower gasoline prices hold back US retail sales, underlying momentum remains

By Lucia Mutikani

WASHINGTON, July 16 (Reuters) – U.S. retail sales increased marginally in June as lower gasoline prices depressed receipts at service stations, but households boosted purchases of motor vehicles and spent more at online outlets, reinforcing economists’ views that consumer spending accelerated in the second quarter.

The economy’s resilience was highlighted by other data on Thursday showing labor market stability, with first-time applications for unemployment benefits dropping to a two-month low last week. The data did not impact views on near-term monetary policy, with economists expecting the Federal Reserve to keep interest rates unchanged later this month.

“Despite challenges, consumers are still spending and the labor market shows no signs of cracking,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “This type of data won’t move the Fed’s needle either way, but it underscores the ongoing resilience of the U.S. economy.”

Retail sales rose 0.2% last month, the smallest gain in five months, after an upwardly revised 1.0% jump in May, the Commerce Department’s Census Bureau said. The increase in retail sales, which are mostly goods and are not adjusted for inflation, was in line with economists’ expectations and followed a previously reported 0.9% advance in May.

Sales rose 6.7% year-on-year in June, despite household budgets being strained by higher prices from import tariffs and more recently the Middle East conflict. Spending continues to be driven by higher-income households, which have seen their wealth boosted by a stock market rally.

Generous tax refunds this year have provided a cushion and consumers have also been tapping into savings and seeking bargains.

The Federal Reserve’s Beige Book report on Wednesday described consumer spending as having edged up in early July, adding that “several districts noted declines in spending on discretionary items or trading down to more affordable varieties.”

Receipts at service stations dropped 5.3% last month after increasing 2.6% in May. Average gasoline prices fell to $4.18 a gallon last month from $4.61 in May, data from the U.S. Energy Information Administration showed.

The modest relief at the pump, which reflected a retreat in oil prices as a shaky ceasefire between the United States and Iran took hold, freed money for spending elsewhere. But the truce collapsed last week and the renewed hostilities in the Middle East have sent oil and gasoline prices rising again.

Receipts at auto dealerships increased 1.9%. Sales at nonstore retailers surged 1.9%, boosted by Amazon’s Prime Day event. Other retailers also offered competing promotions. Electronics and appliance store sales increased 0.8%.

Receipts at sporting goods, hobby, musical instrument and book stores jumped 1.3%, likely boosted by the FIFA World Cup tournament. But sales at food services and drinking places, the only services category in the report, rose only 0.1%.

Sales at building material and garden equipment outlets edged up 0.1%, while receipts at furniture stores were flat. Health and personal care store sales dropped 0.8%. There were also decreases in receipts at clothing, and food and beverage retailers. These declines could reflect price cuts by retailers eager to attract customers or falling demand as consumers resist higher prices.

U.S. stocks opened lower. The dollar edged up against a basket of currencies. U.S. Treasury yields were higher.

LABOR MARKET STABLE

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.5% in June after an upwardly revised 0.8% rise in May. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product, and were previously reported to have advanced 0.7% in May.

Economists expect consumer spending, which accounts for more than two-thirds of the economy, picked up in the second quarter after almost stalling in the January-March quarter. The Atlanta Fed’s model is currently forecasting GDP growth at a 1.3% annualized rate in the April-June quarter. The economy grew at a 2.1% pace in the first quarter.

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 208,000 for the week ended July 11, the lowest level since May. Economists had forecast 217,000 claims for the latest week.

Claims have retreated after surging at the end of May and staying elevated through mid-June. Some of the recent decline likely reflected big automakers, like General Motors and Ford, foregoing the traditional summer assembly plant shutdowns for retooling and maintenance.

Claims are at levels that economists say are consistent with what they call a “slow hire, slow fire” labor market.

The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, fell 16,000 to a seasonally adjusted 1.805 million during the week ended July 4, the claims report showed.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )