July surge in spending fraught with caution

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U.S. consumers snapped out of a spring funk last month and went on a shopping spree. That sent sales at department stores, restaurants, auto showrooms and other retailers up smartly by 0.8 percent, the U.S. Census Bureau reported Tuesday morning.

The spending splurge follows three months of flat or declining sales in the spring as a soft spell engulfed the economy. The jump in spending last month was across the board and suggests that consumers have cast caution to the wind, for now, and are resuming their role as the chief engine of the U.S. economy.

“Here comes the U.S. consumer,” said Harm Bandholz, economist at Unicredit Research. He is not surprised that consumers are back, given recent improvements in income, rising home prices, renewed confidence and a savings buffer consumers built up during the spring.

The consumer revival is good news not only for the U.S. economy, but also for the ailing world economy, Mr. Bandholz said. U.S. consumers “remain an important source of final demand” worldwide.

A separate report on sales at U.S. chain stores confirms that consumers came out in droves last month, driving up sales by a robust 4.6 percent over last year. End-of-summer clearance sales and back-to-school sales appeared to boost activity, although some of the increase last month also reflected a rise in prices at the gasoline pump.

“These are quite reassuring data,” said Chris Williamson, chief economist at Markit. “The U.S. economy fared surprisingly well in the face of ongoing uncertainty and renewed contraction in the eurozone.”

The spending surge in July should be taken with “caution,” however, in light of the big decline in sales during the spring and historic volatility of consumer spending patterns, he said.

“The three-month growth trend is still the weakest for almost three years,” he said. “Further gains are required in coming months to instill more confidence that this is a genuine improvement in underlying consumer demand.”

Eugenio J. Aleman, economist at Wells Fargo Securities, agreed that it’s not yet clear whether the revival will last for more than one month. He expects the economic and political environment to be “challenging” for consumers in the months ahead as uncertainty surrounding the elections and federal spending and tax matters intensifies.

“It is certainly nice to get some good news on the U.S. economy once in a while,” said Jennifer Lee, economist at BMO Capital Markets, noting there wasn’t a spot of weakness in July’s retail sales report. “I’m going to sit back and let this soak in a bit.”

After a brief moment of celebration, she added that “stronger growth is needed to ensure this momentum continues” and translates into a genuine economic revival.

Separately, the government reported that wholesale prices increased by a seasonally adjusted 0.3 percent in July from 0.1 percent in June, as rising auto and food prices offset a fall in energy prices. Overall, inflation remains mild. Energy prices fell for the fifth straight month, with gas costs down just over 3 percent last month.

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