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Strong US Retail Sales Boost Economic Outlook

US retail sales increased more than expected in June, pointing to strong consumer spending.

The Key takeaway from the report is that it was a solid report overall

The report from the Commerce Department on Tuesday did not change market expectations that the FOMC will cut interest rates this month for the 1 st time in a decade at its 30-31 July meeting.

But signs of strong consumer spending and rising underlying inflation suggest the US central bank is unlikely to cut rates by 50 bpts at the meeting as markets had initially anticipated.

Fed Chairman 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.

Retail sales increased 0.4% 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%, instead of rising 0.5% as previously reported.

Economists polled had forecast retail sales edging up 0.1% in June. Compared to June last year, retail sales advanced 3.4%.

Excluding autos, gasoline, building materials and food services, retail sales jumped 0.7% last month after an upwardly revised 0.6% increase in May. These core retail sales, which correspond most closely with the consumer spending component of GDP, were previously reported to have increased 0.4% in May.

June’s strong gain in core retail sales, coming on the heels of solid increases in April and May, signal an acceleration in consumer spending in Q-2. Consumer spending grew at its slowest pace in a year in Q-1.

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

The Fed reported Tuesday that manufacturing output rose 0.4% in June, boosted by increased production of motor vehicles and parts, after gaining 0.2% in May.

Still, factory production dropped at an annual rate of 2.2% in Q-2, the biggest fall in 3 years, after contracting at a 1.9% rate in the January-March period.

Healthy consumption growth is especially important now as the US and global industrial slump that we expect to contribute to an outright decline in real business fixed investment in Q-2 and as manufacturers continue to work off the inventory overhang

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