Retail sales were a modest disappointment in July, but continued their recent advance, rising 0.2%. This was the fourth consecutive monthly gain, as rising confidence has prodded consumers to open up their wallets. Excluding auto sales, retail sales rose by a more robust 0.5%.
Steady job creation, rising stock prices, and positive momentum in the housing sector have been catalysts for the sharp rise in consumer confidence levels since early this year. Surging confidence has ultimately contributed positively to spending in recent months.
The U.S. consumer is still the backbone of the domestic economy, accounting for over 70% of GDP. Despite the public sector spending cuts and modest business investment, U.S. households are still spending, although the gains remain moderate. Growth in disposable income has been meager, held in check this year in part by higher household tax bills.
If the economy gathers a bit more momentum as the Fed is projecting, it may begin paring back its bond purchases as soon as next month, effectively trimming the degree of stimulus it is providing to the economy. While such a move could lead to volatility across the capital markets, the passing of the baton from the Fed’s stimulus to self-sustaining growth is a necessary step for the long-term health of the economy. Whether or not the economy is strong enough to start down that path is a major unanswered question, and one that the Fed must sort out in the near-term. That process, and any hints that the Fed may proceed with tapering in the near-term, is likely to be a source of anxiety for investors.
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