US retail sales rise 1% in July to record high; 3 new bankruptcies

US consumer spending rose higher than expected in July, potentially easing concerns over a weakening economy.

Total sales at retailers and food service establishments in July ticked up by about 1% from June and 2.7% from July of last year, according to advance US Census Bureau estimates released Aug. 15. This beat a milder 0.3% improvement forecast by economists, according to consensus estimates compiled by Econoday.

"Retailers caught a [midsummer] tailwind from consumer spending in July, providing another solid piece of data indicating that the economy remains on an expansionary path," said Jim Baird, chief investment officer with Plante Moran Financial Advisors, in an Aug. 15 note.

Meanwhile, three retailers entered bankruptcy proceedings during the month ended Aug. 15. The median default risk for all retail categories was roughly flat from mid-July to mid-August.

Retail sales

Total US retail and food services sales hit a record $709.67 billion, up from a revised $702.86 billion in June and $704.31 billion in May, according to Census Bureau and Federal Reserve Economic Data figures.

Spending saw the biggest month-on-month gain at motor vehicle and parts dealers with a 3.6% increase. Through the first seven months of the year, sales in this category were also up 1.4% compared to the same period last year. Sales at gas stations were down 0.6% in the same seven-month comparison.

Electronics and appliance stores recorded the second-biggest increase from June with a 1.6% uptick.

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Among major retail categories tracked by the Census Bureau data, the only month-over-month sales decline was seen at clothing and clothing accessories stores, albeit at a slight 0.1% drop.

Mixed economic signals ahead of possible rate cut

The "midsummer boost" was likely caused by back-to-school spending and retailer promotions, National Retail Federation Chief Economist Jack Kleinhenz said in an Aug. 15 news release.

Economic optimism from the Census Bureau retail numbers follows positive indications this week that inflation continues to taper off at a slow pace. These metrics contrast with July's increase in unemployment, which observers believed could spur a more urgent response from the US Federal Reserve through earlier or more aggressive interest rate cuts.

"Even with growth of the labor force cooling, consumer spending remains the backbone of the economy and is keeping the expansion on a positive path," Kleinhenz said.

July's retail sales, paired with lower jobless claims data released Aug. 15, prove the ongoing resilience of the US market despite the earlier unemployment report, ING Chief International Economist James Knightley said in an Aug. 15 note. Collectively, the data suggests that the Fed will pursue a 25-basis-point interest rate cut at its next meeting in September, Knightley said.

The odds of a 25-bps cut in September rose to 75.5% Aug. 15, up from 64% a day earlier, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market. The odds of a larger cut fell to 24.5% from 36%. Probabilities remained roughly at their Aug. 15 levels through early Aug. 19.

Bankruptcies

The three retail bankruptcy announcements since July 16 brought the total number of filings year to date to 24, the fastest pace since 2020.

The most recent bankruptcy filing was announced Aug. 11 by LL Flooring Holdings Inc. The company said a court on Aug. 14 granted interim approval for a debtor-in-possession financing agreement of up to $130 million from its existing bank group led by Bank of America NA.

Default risk

The median default risk for publicly traded US retailers on Aug. 14 was relatively unchanged from July 15 at 2.4%, according to S&P Global Market Intelligence data. The scores represent the median odds of default on debt within a year and are based primarily on the volatility of share prices for public companies on major US exchanges, accounting for country- and industry-related risks and other macroeconomic factors.

Among the retail industries, the household appliance sector recorded the largest decrease in default risk, with its median one-year probability of default score dropping to 3.9% on Aug. 14 from 5.0% on July 15. The default risk in mid-July had also fallen from 7.8% in mid-June.

The consumer electronics sector saw the highest increase in the median probability of default, rising to 3.4% from 2.9%.