• U.S. retail sales unexpectedly rose in August, driven by a surge in online purchases.
• The Atlanta Fed revised its third-quarter GDP growth estimate upwards to a 3.0% annualized rate.
• Retail sales increased by 0.1% last month, defying economists' predictions of a 0.2% fall.
• The unexpected rise in retail sales and a decrease in the unemployment rate paint a positive picture of the U.S. economy.

In a surprising turn of events, U.S. retail sales saw an unexpected rise in August, defying the anticipated decline. This increase was primarily driven by a surge in online purchases, which more than compensated for a drop in auto dealership receipts. This suggests that the U.S. economy remained robust throughout most of the third quarter.

The Commerce Department's report, released on Tuesday, also revealed that retail sales in July were stronger than initially estimated. This, coupled with a decrease in the unemployment rate last month, has challenged financial market expectations of a half-percentage-point interest rate cut from the Federal Reserve on Wednesday. The U.S. central bank officials began a two-day policy meeting on Tuesday.

Following the release of the retail sales data, the Atlanta Fed revised its third-quarter GDP growth estimate upwards to a 3.0% annualized rate from a 2.5% pace. This mirrors the economy's growth rate in the second quarter.

Economists and Market Reactions

Christopher Rupkey, chief economist at FWDBONDS, commented on the situation, stating, There does not appear to be any reason for Fed officials to start out with a larger 50 basis points rate cut because whatever stress there is in the labor market, it isn't translating into weaker economic demand. He further added, If this is an economy on the brink of recession, consumers certainly don't see it.

The Commerce Department's Census Bureau reported that retail sales increased by 0.1% last month, following an upwardly revised 1.1% surge in July. This defied economists' predictions, who had forecast a 0.2% fall in retail sales, which are primarily goods and are not adjusted for inflation, after a previously reported 1.0% jump in July.

On a year-on-year basis, retail sales increased by 2.1% in August. Online store sales rebounded by 1.4% after a 0.4% decline in July. Sales at gasoline stations dropped by 1.2%, reflecting lower prices at the pump. This decrease in gasoline prices is likely freeing up money for other spending.

Sector-wise Sales Performance

Sales at sporting goods, hobby, musical instrument, and book stores increased by 0.3%. Building material and garden equipment store sales edged up by 0.1%. Sales at miscellaneous retailers shot up by 1.7%, while those at health and personal care outlets increased by 0.7%.

However, sales at food services and drinking places, the only services component in the report, remained unchanged after rising by 0.2% in July. Economists view dining out as a key indicator of household finances. Furniture store sales fell by 0.7%. Receipts at electronics and appliance outlets dropped by 1.1%, while those at clothing retailers decreased by 0.7%. Receipts at motor vehicle and parts dealers dipped by 0.1% and department store sales tumbled by 1.1%.

Some of the decline in sales was likely due to lower prices rather than volume. Prices for goods, including furniture, have been on a downward trend.

Market Expectations and Future Outlook

Following the release of the retail sales data, financial markets saw a roughly 59% probability of a 50 basis points rate cut on Wednesday, down from 67% before the retail sales data was published, according to CME Group's FedWatch Tool. The odds of a quarter-point rate reduction were around 41%, up from 33% earlier.

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for more than a year, having raised it by 525 basis points in 2022 and 2023. Most economists expect the central bank to cut interest rates by 25 basis points on Wednesday, arguing that the economy is not in enough distress to warrant the half-percentage-point reduction being anticipated by financial markets.

The unemployment rate fell to 4.2% in August after four straight monthly increases lifted it to a near three-year high of 4.3% in July. The jobless rate has been largely driven by increased labor supply from immigration, which is now slowing.