Key Points

  • Retail sales rose 0.6% month-over-month in August, marking the third consecutive monthly increase, despite a weak labor market and declining consumer confidence.
  • Nine of 13 product categories recorded gains, with e-commerce sales up 2%, and clothing stores and sporting goods, hobby stores seeing revenue increases of 1% and 0.8%, respectively. Data released Tuesday by the U.S. Commerce Department showed July's sales growth was revised up to 0.6% from a previous 0.5%.
  • RSM US Chief Economist Joseph Brusuelas said on platform X that healthy retail sales highlight a "slow-hiring, slow-firing economy and a strong back-to-school shopping season." He noted, "This is why it is premature to rush to judgment on a recession after a series of weak employment reports," and expects "solid but not spectacular" growth in the third quarter.

Deeper Analysis

Following the retail sales report, the Atlanta Federal Reserve raised its forecast for third-quarter annualized gross domestic product (GDP) growth by 0.3 percentage points to 3.4%.

Consumer spending, which accounts for about 70% of U.S. economic growth, has remained stable in recent months, despite headwinds such as rising price pressures, slowing hiring, an unemployment rate climbing to 4.3%, and declining household confidence.

Earlier this year, spending surged as consumers pulled forward purchases ahead of price increases triggered by the highest tariffs since the 1930s. Apollo Global Management Senior Economist Torsten Sløk noted in a report that this trend has weakened since May, with "a modest slowdown in spending" in recent weeks.

Sløk believes import tariffs have weighed on sales. In the week ending September 5, sales at stores selling seven categories of tariff-affected goods—including sporting goods, books, electronics, appliances, clothing, and motor vehicles—declined compared to the 90-day average.

Commerce Department data showed furniture sales—a major category of imported goods—fell 0.3% last month.

Sløk pointed out that spending on services and goods less affected by tariffs, such as restaurants, hotels, building materials, and gardening equipment, has remained stable.

This data aligns with recent surveys from The Conference Board and the University of Michigan, which show consumers are anxious about import tariffs driving up prices.

In fact, a survey released Tuesday by KeyBank of 2,144 small businesses with annual gross revenue under $10 million showed that a quarter of small business owners said tariffs and rising costs have prompted them to raise prices.

In recent weeks, Federal Reserve officials have become less concerned about tariff-driven inflation risks and risks to consumer spending, shifting more focus to weakness in the labor market.

Based on bets from interest rate futures traders, policymakers are likely to cut their key interest rate at the end of their two-day meeting on Wednesday. The CME FedWatch tool shows traders see a 96% probability of a 25-basis-point cut (lowering the rate from the current 4.25% to 4.5% range) and a 4% probability of a 50-basis-point cut.