By Reade Pickert and Katia Dmitrieva
(Bloomberg) — U.S. retail sales and factory output in June exceeded expectations and underscored steady economic growth even as Federal Reserve officials signal they’re prepared to reduce interest rates.
The value of retail purchases rose 0.4% for a second month, more than the 0.2% median projection in a Bloomberg survey of economists, Commerce Department data showed Tuesday. Production at the nation’s manufacturers also advanced 0.4%, the most this year, according to a separate report from the Fed.
Yields on the 10-year Treasury note rose and the dollar advanced after the reports, though traders maintained bets that the central bank will lower borrowing costs at least a quarter-point later this month.
Sales in the “control group” retail subset, a key gauge which excludes food services, car dealers, building-materials stores and gasoline stations, increased 0.7%, also exceeding projections. In the second quarter, the measure jumped an annualized 7.5%, the strongest quarterly performance since the final three months of 2005. Some analysts view the measure as a more accurate gauge of underlying consumer demand.
Even with the June gain in factory output, the measure fell during the second quarter at a 2.2% annual rate for the first back-to-back declines since 2016 — evidence of weakness that the central bank could potentially cite as one of the reasons for an interest-rate cut.
The retail figures show the biggest part of the economy — consumer spending -- continues to drive economic growth, while business spending and manufacturing remain the weak links due to tepid global demand and trade policy concerns. The latter, along with muted inflation, help explain why Fed policymakers have indicated they are open to reducing their benchmark interest rate as “insurance” against external risks to the economy.
“The retail sales data today gives you comfort that the domestic economy is in good shape and the consumer is in a good spot," said Michael Gapen, chief U.S. economist at Barclays Plc. “Business spending, business confidence and manufacturing production are where the economy is slowing and if the Fed is looking to insulate the economy, some cuts to support financial market conditions and keep the domestic economy strong is still a reasonable response.”
Another report Tuesday showed sentiment among U.S. homebuilders crept higher in July after falling the previous month, indicating lower mortgage rates are helping shore up demand.
The retail gain underscores Fed Chairman Jerome Powell’s view that consumer spending and finances remain healthy amid a tight labor market that’s been supporting the expansion. Strength at retailers may also complicate the debate for policymakers as they gather July 30-31 to chart their course amid growing headwinds from slowing global growth to trade tensions.
Eleven of 13 major retail categories increased, led by a 1.7% increase in nonstore retailers, which include online vendors.
The retail sales gain “feeds into the narrative we’ve been seeing which is consumer strength continuing to support the economy with a strong labor market and wage growth,” said Scott Brown, chief economist at Raymond James Financial Inc. “It’s consistent with consumer spending supporting the overall economy, but part of the strength we’re seeing in the second-quarter numbers is payback because the first quarter was so soft.”
Powell in congressional testimony last week left it all but certain that the Fed is poised to cut rates for the first time in a decade. Still, he told lawmakers that consumer spending has reliably driven growth and rebounded to a solid pace after first-quarter weakness.
The initial reading of second-quarter gross domestic product is due July 26. A survey this month showed growth probably slowed to a 1.8% annualized pace from 3.1%, though consumption was seen picking up.
The Fed’s industrial production report showed manufacturing was bolstered by a solid gain in motor vehicle output. Total industrial production, which includes mines and utilities, was unchanged as milder-than-usual weather reduced demand for air conditioning.
Additional reporting from Kristy Scheuble.