Retail Sales Notch Another Strong Month. Wall Street Was Depending on It.

Economists expect retail sales rose 0.5% in July from June. (Mario Tama/Getty Images)

Wall Street got the “Goldilocks” retail sales report it wanted.

Consumer spending ticked up line with economists’ expectations in July, suggesting American households remain resilient, despite ongoing economic uncertainty.

Retail sales rose 0.5% in July from June, according to the Census Bureau on Friday. While that marks a slowing from June’s upwardly revised 0.9% gain, it still points to solid spending trends.

Sales rose 3.9% on an annual basis.

Wall Street was watching the report closely. Investors have their hopes up for rate cuts this fall and are on the hunt for any signal on how probable that it.

The in-line reading gave investors what they were looking for: It was “right down the middle”—not too hot and not too cold, said Mike Reynolds, vice president for investment strategy at Glenmede, ahead of the report.

A large beat could have sparked concern by both the Federal Reserve and the markets—that consumer demand is outstripping supply, spurring inflation higher and giving policymakers reason to hold rates steady.

And a significantly weak report could have reinforced calls for rate cuts—but it would also have been a warning sign for the broader economy. Roughly 70% of the country’s gross domestic product is tied to consumer spending.

As it is, the July report didn’t seem to alter investors’ views of how the central bank will set rates at the September meeting of the Federal Open Market Committee. As of Friday morning, betting markets had allotted a roughly 95% chance that the Fed lowers the federal-funds rate by a quarter of a percentage point, slightly higher than the 93% probability Thursday afternoon.

Consumer spending has remained surprisingly resilient over the past five years, buoyed by a strong labor market and income growth. But there have been signs lately that consumers tightened their belts in response to tariff uncertainty and immigration policy.

Although retail sales for June and July were robust, May’s and April’s reports were lackluster. At last month’s Fed meeting, Chair Jerome Powell said there was “no question” spending was slowing. The strength of the July numbers, however, suggests the slowdown will be gradual—not an abrupt pullback.

“Consumers maintain a moderate rate of spending and even picked up the pace in the past two months as the tariff-price pass-through has been limited thus far,” wrote Kathy Bostjancic, chief economist at Nationwide.

Inflation measured by the consumer price index held steady in July at a 2.7% annual rate. Spending strength was fairly resilient across consumer segments last month, notching gains at nine of the 13 categories tracked by the Census Bureau.

Car sales were particularly strong, climbing 1.6% monthly for vehicles and parts. Home furnishings stores increased 1.4%. And e-commerce retailers and sporting goods and hobby stores gained 0.8% on the month. The rise in e-commerce sales was probably because of Amazon.com’s Prime Day event in mid-July—and the competing sales offered by other retailers.

Some of the strength could be from consumers trying to get ahead of tariff-induced price increases, but “it’s tough to say how much of this is tariff buying pull forwards and what was organic,” wrote Peter Boockvar, chief investment officer of One Point BFG Wealth Partners.

Weaker categories included miscellaneous store retailers, down 1.7%, building materials stores, down 1%, electronics and appliances stores, off 0.6%. Restaurants and bar sales were also negative, declining 0.4% from June.

Fast-casual dining companies, including Cava Group, Sweetgreen, and Chipotle, have warned that consumers are eating out less. In April, for example, Chipotle posted its first comparable-sales decline since the pandemic.

“Going forward, investors should monitor auto sales and other discretionary categories such as restaurant spending to gauge consumer health,” said Jeffrey Roach, chief economist for LPL Financial. “Recession risks remain low, but I think it’s wise for the Fed to shift to a more neutral stance and cut rates in coming meetings.”

Write to Sabrina Escobar at sabrina.escobar@barrons.com