Shoppers spend, households despair: August retail sales rebound

Retailers’ sales rose by 1.2% in August, against a 0.5% decrease recorded in July, and beat the 0.8% increase economists had expected¹. The rebound followed a decline in July that was initially reported at -0.6%, and a 0.3% increase in June². The gain was broad: twelve of thirteen categories expanded, with autos and school supplies leading¹⁰.

Sentiment moved the opposite way. The University of Michigan’s Index of Consumer Sentiment fell to 51.0 in August from 55.2 in July, a drop of 7.6%, as households grew more anxious⁵. The same index fell to 47.8 in early September, the second-lowest reading on record⁶. Wire coverage of the sales report noted plainly that consumer sentiment deteriorated this month⁷.

Why it matters to investors

The split matters more than either number alone. Spending is being supported by steady wage growth and recent stock market gains rather than by confidence⁹, which makes it a function of asset prices and payrolls rather than of how people feel about the economy. One reading of the report pointed to continued resilience in consumer spending⁴.

That resilience is what gave the Fed room to move. The growth data came in hot enough to sit alongside a rate rise rather than argue against one, and the Atlanta Fed’s GDPNow estimate for third-quarter growth jumped to 5.1% from 4.4% on September 16⁸. Forecasters reading the same report saw solid domestic demand carrying into the third quarter². Retail sales are a preliminary indicator that tracks goods purchases inside overall consumer spending³, so they catch the turn early but not the whole picture.

What to watch

The question is which of the two series is leading. If spending is propped up by wealth effects and wage growth⁹, then an equity drawdown or a softer labour market would take the prop away quickly, and sentiment would turn out to have been the earlier signal.

Watch the composition too. Building materials were the category in decline⁴, and one month of auto-led strength¹⁰ is not the same as durable demand. Watch the September sentiment print against the 47.8 early reading⁶, and watch whether the July weakness that was first put at -0.6% gets revised again². Above all, watch whether the GDPNow track holds near 5.1%⁸ or converges back toward the slower path the confidence numbers imply⁵.