US retail sales remain strong in August

Retail sales rose 0.2% m/m in August, slightly below the median consensus forecast of 0.3% m/m. Revisions to the month prior were positive though, with July's initial reading of 0.6% m/m revised higher to 0.7% m/m.

The miss on the headline reading was entirely due to price effects, as lower gasoline prices resulted in nominal sales at the pump to decline by 1.9% m/m. Vehicle sales were up for the second month in a row, rising by 0.7% m/m.

After excluding sales of autos, gasoline and building materials, the control group - the measure which drives many of the BEA's consumer spending metrics for calculating GDP - rose by 0.4% m/m. The gain was slightly above the consensus estimate of 0.3% m/m. Also encouraging were the solid revisions to the month prior, with the initial July reading of 0.3% m/m revised significantly higher to 0.6% m/m.

Sales remained strong across the board, with 10 of the 13 major sub-categories recording gains on the month. The largest gains were concentrated among miscellaneous retailers (+0.9% m/m), health & personal care (+0.8% m/m), food & beverage (+0.7% m/m) and food services & drinking places (+0.7% m/m).

Outside of sales at gasoline stations, sales of building materials (-1.8% m/m) and furniture & home furnishings (-0.9% m/m) were the only other sub-categories that were lower on the month.

This is a strong report with the control measure coming in better than expected in August, following on a materially upwardly revised reading to the month prior. Overall, this suggests a stronger consumer spending profile for the third quarter, with real PCE growth comfortably above 3% at this point, nudging up Q3 tracking for real GDP to 2.5% (annualized).

While the rise in the motor vehicle & parts subcomponent was already telegraphed earlier in the month, the recent gains in the auto segment should not be overlooked. At 17.7 million (annualized) units, auto sales are currently sitting at their highest level since 2005.

"We do expect some unwinding in the months ahead, the fact that sales remain elevated in light of the recent bout of financial market volatility, speaks to the increasing confidence of the American consumer about the economy", says TD Economics

This confidence has also manifested in the housing market through much of 2015, with both home sales and housing starts recently reaching new cyclical-highs. While these recent gains in the housing sector have yet to materially show up at retailers (both furniture and building materials sales remaining soft in recent months), we should start to see some strength across these segments in the months ahead.

From the FOMC's perspective, this morning's report provides further evidence that the domestic side of the economy continues to strengthen at a healthy pace. Still, this morning's report will not be enough to force the Fed's hand later this week, especially given the current benign inflationary environment and continuing global uncertainty.  However, as the headwinds from a higher dollar and lower energy prices begin to abate, inflationary pressures should begin to turn higher, giving the FOMC the confirmation they need to take interest rates off the floor in the near future.