Stocks surge after retail sales data reveals Americans are still shopping.

Wall Street reacted positively to new data showing that American consumers are still spending, despite recent struggles for retailers.

According to a report by the Commerce Department on Tuesday, US retail spending has remained mostly flat since the beginning of the year, holding steady in June. Consumer spending, which drives two-thirds of the US economy, plays a significant role in the nation’s economic health. Retail sales, including spending on goods and food services, constitute a large portion of this spending.

The June retail sales figures were better than the decline economists had projected in a FactSet poll, marking an improvement from previous months when retail sales consistently fell short of expectations. These figures are adjusted for seasonal variations but not for inflation.

This unexpected resilience in consumer spending helped boost stocks on Tuesday, with the Dow reaching a new record high.

In June, sales at gas stations saw the largest decline, dropping 3% from May. Spending at car dealerships and on automotive parts also fell significantly, partly due to a cyberattack on CDK Global, a software provider for dealerships. Excluding gas stations and car-related spending, retail sales increased by a solid 0.8% in June.

Online sales rose by 1.9% in June, with continued strength expected in July due to Amazon’s Prime Day. Sales at home improvement stores were also strong, increasing by 1.4% last month. The Federal Reserve and Wall Street investors are closely monitoring the health of US consumers. While unemployment has risen slightly, indicating cautious spending, the consumer sector remains critical to economic stability.

Despite the challenges of inflation, high interest rates, depleted pandemic savings, and fewer job opportunities compared to previous years, US consumers continue to spend. Retailers have noted that more shoppers are opting for cheaper alternatives.

As earnings season begins, big-box stores are expected to provide key insights into Americans’ spending habits. Although the US economy is slowing, a recession is not anticipated this year. However, it is uncertain whether unemployment will stabilize or continue to rise after reaching 4.1% in June, the highest since November 2021.

“Consumers have become increasingly cautious with their spending as they feel the pinch from higher prices and borrowing costs, but the latest report shows no signs of consumer retrenchment,” said Lydia Boussour, a senior economist at EY-Parthenon, in a note on Tuesday.

Companies continue to express concerns about the financial health of US consumers.

Helen of Troy, known for brands like Vicks, Braun, and Revlon, recently reported disappointing quarterly earnings, causing its shares to drop more than 25%. CEO Noel Geoffroy highlighted on an earnings call that consumers are facing increased financial strain, leading them to prioritize essentials over discretionary purchases. Geoffroy also noted slower overall consumer traffic and rising promotional pressures nationwide.

PepsiCo’s recent earnings also fell short of expectations, particularly in its Frito-Lay snack unit, which saw revenue decline after several quarters of price hikes. The company attributed this to tighter household finances among US consumers, resulting in subdued performance across various food categories, including snacks, as consumers become more price-sensitive.

Conagra Brands, the company behind Slim Jim beef jerky and Vlasic pickles, reported weaker sales in its latest quarter and anticipates lower profits in the coming fiscal year. CEO Sean Connolly acknowledged disappointing consumer demand but expressed optimism that it would improve as consumers adjust to new pricing norms.

Overall, these reports underscore ongoing challenges in consumer spending and financial pressures that companies are navigating in the current economic environment.

What it means for the Federal Reserve (Fed)?

Tuesday’s report doesn’t alter the central bank’s considerations as it weighs when to implement the initial interest rate reduction.

The Fed appears inclined to lower interest rates in the coming months, given that inflation has once again moderated following earlier stagnation this year. The most recent Consumer Price Index, published last week, indicated a decrease in monthly prices for June. Annually, prices rose by 3%, a decline from May’s 3.3% rate. These recent inflation figures, coupled with indications of a slowing economy reflected in recent spending data, strengthen the argument for Fed officials to commence reducing interest rates.

Fed Chair Jerome Powell expressed optimism about the latest inflation data on Monday during a moderated discussion in Washington, stating, “We’ve observed three consecutive favorable readings, which, when averaged, represent a commendable pace.” He additionally noted that recent economic indicators “provide some reassurance” that inflation is coming under control.

Currently, traders on Wall Street anticipate the Fed will implement its initial rate cut at the September 17-18 meeting. However, there remain several critical economic data releases scheduled before central bank officials convene to deliberate on monetary policy.