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A Walmart store in Rosemead, California. Walmart has said it will raise prices as a result of the Trump administration’s tariffs on Chinese-made goods. Image Credit: AFP

Washington: US retail sales increased more than expected in June, pointing to strong consumer spending, which could help to blunt some of the drag on the economy from weak business investment.

The report from the Commerce Department on Tuesday did not change market expectations that the Federal Reserve will cut interest rates this month for the first time in a decade.

But signs of strong consumer spending and rising underlying inflation suggest the US central bank is unlikely to cut rates by 50 basis points at its July 30-31 policy meeting as markets had initially anticipated.

Fed Chairman Jerome Powell last week told lawmakers the central bank would “act as appropriate” to protect the economy against risks stoked by a trade war between the United States and China, as well as slowing global growth.

“It certainly will counteract weak business spending to some degree,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. “Given that the Fed is most worried about foreign economies and the threat of an escalating trade war, it is unlikely to dissuade them from cutting rates soon.” Retail sales increased 0.4 per cent last month as households stepped up purchases of motor vehicles and a variety of other goods.

Data for May was revised slightly down to show retail sales gaining 0.4 per cent, instead of rising 0.5 per cent as previously reported.

Economists polled by Reuters had forecast retail sales edging up 0.1 per cent in June. Compared to June last year, retail sales advanced 3.4 per cent.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.7 per cent last month after an upwardly revised 0.6 per cent increase in May. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have increased 0.4 per cent in May.

June’s strong gain in core retail sales, coming on the heels of solid increases in April and May, suggested an acceleration in consumer spending in the second quarter. Consumer spending grew at its slowest pace in a year in the first quarter.

The dollar rose against a basket of currencies, while US Treasury prices fell.

Broad gains

Consumer spending is being supported by a tight labour market, even as the broader economy is slowing as weaker business investment, an inventory overhang, a trade war between the United States and China, and softening global growth pressure manufacturing.

The Fed reported on Tuesday that manufacturing output rose 0.4 per cent in June, boosted by increased production of motor vehicles and parts, after gaining 0.2 per cent in May. Still, factory production dropped at an annual rate of 2.2 per cent in the second quarter, the biggest drop in three years, after contracting at a 1.9 per cent rate in the January-March period.

“Healthy consumption growth is especially important now amid the US and global industrial slump that we expect to contribute to an outright decline in real business fixed investment in the second quarter and as manufacturers continue to work off the inventory overhang,” said Roiana Reid, an economist at Berenberg Capital Markets in New York.

The Atlanta Fed is forecasting GDP increased at a 1.4 per cent annualised rate in the second quarter. The economy grew at a 3.1 per cent pace in the January-March quarter. The government will publish its snapshot of second-quarter GDP next Friday. The economy is losing speed in part as last year’s stimulus from massive tax cuts and more government spending fades.

Auto sales increased 0.7 per cent in June after a similar gain in May. Receipts at service stations fell 2.8 per cent, reflecting cheaper gasoline. Sales at building material stores rebounded 0.5 per cent after dropping 1.5 per cent in May.

Receipts at clothing stores rose 0.5 per cent. Online and mail-order retail sales climbed 1.7 per cent, matching May’s increase. Receipts at furniture stores advanced 0.5 per cent. Sales at restaurants and bars surged 0.9 per cent. Spending at hobby, musical instrument and book stores was unchanged.

While core inflation perked up in June, gains are likely to remain moderate. A separate report on Tuesday from the Labor Department showed import prices dropped 0.9 per cent last month, the biggest decrease in six months, after being unchanged in May.

Import prices, which exclude tariffs, were held down by a 6.2 per cent drop in the cost of petroleum products. There were also decreases in the prices of imported food and capital goods.

The cost of goods imported from China slipped 0.1 per cent, matching May’s drop. Prices of Chinese goods fell 1.5 per cent in the 12 months through June, the largest decrease since February 2017.