Weak Economy, Strong Retail Sales in August

Economic Trends in August: A Mixed Picture

August presented a mixed picture for the U.S. economy, with several indicators showing signs of weakness. Hiring slowed down, unemployment rates increased, and inflation remained stubbornly high. However, consumer spending showed some resilience, potentially bucking the overall trend.

Economists are anticipating that retail sales increased by 0.2% in August compared to July, according to FactSet consensus estimates. When excluding gas and auto sales, the projected rise is slightly higher at 0.4% on a monthly basis. This adjustment reflects the assumption that weaker car sales volumes will impact the headline number.

Frances Donald, chief economist at RBC Economics, notes that consumption activity and retail sales have continued to move steadily, without significant acceleration or deceleration. She highlights that resilient spending by higher-income households is playing a key role in lifting overall consumer activity. The record-breaking bull run in equities and rising home prices have contributed to increased household wealth, allowing consumers to spend despite broader economic softening.

The labor market has shown limited job growth throughout the summer months, with a loss of 12,000 jobs in June. The unemployment rate climbed to 4.3% in August, the highest since 2021. Recent revisions to 2024’s labor market data indicate that the economy added nearly one million fewer jobs in the 12 months through March, marking the largest revision in estimated annual hiring in decades.

These payroll revisions make the past year of solid retail sales growth even more impressive, according to Glenmede’s Jason Pride and Michael Reynolds. They note that aggregate consumer spending has held up well despite tepid job growth, indicating a baseline resilience in U.S. household spending that is expected to continue into August.

Bank of America credit and debit card data suggest that the retail sales report could still surprise to the upside. BofA economist Aditya Bhave points out that total card spending rose by 0.4% in the month, or 1.7% year over year, with card spending accelerating for both lower and higher income households throughout the month.

Bhave argues that the divergence between job and spending growth is unlikely to last, leaving the economic outlook at a crossroads. Consumers may either weaken their spending as they become more concerned about employment and income prospects, or the labor market could recover to match the strength in consumer spending. He leans toward the latter scenario, maintaining a more bullish outlook on spending in the coming months.

Stephanie Link, chief investment strategist and portfolio manager at Hightower Advisors, shares this perspective. She points to recent commentary from company executives highlighting consumer resilience, including statements from Bank of America CFO Alastair Borthwick, Wells Fargo CFO Michael Santomassimo, and Walmart CEO Doug McMillon.

“We’re seeing it and hearing it from companies—if you have the right product or the right services, the consumer is spending,” she says.

However, the next few months will be critical in determining how tariffs reshape consumer behavior, according to Pride and Reynolds. Tariff-induced price increases are likely to intersect with stretched household budgets ahead of the holiday season—a dynamic that the Federal Reserve will closely monitor as it makes decisions on monetary policy in the coming months.

The retail sales report will be the last major economic datapoint released before the central bank concludes its September meeting of the Federal Open Market Committee. Betting markets currently favor a 96% probability that policymakers will cut interest rates by a quarter of a percentage point.