Consumers in America are once more feeling anxious over inflation. Despite this, they continue to make purchases.
The US economy continues to show resilience, with consumer spending and corporate profits heavily dependent on the sustained momentum of consumer spending and businesses retaining workers. According to recent data, unemployment remains low at 4.2%, a testament to the economy's strength.
Earlier this year, consumer sentiment improved, with a sense of relief that the worst of Trump's trade war might finally be in the rearview mirror. However, this month, consumer sentiment has taken a dip, with a preliminary reading of 58.6, a 5% decrease, according to the University of Michigan. Despite this, consumers continue to expect both inflation and unemployment to deteriorate in the future.
The resilience of consumer spending, which contributes about 70% of economic output, is evident in the latest retail sales figures. While spending at US retailers rose 0.5% in July, down from June's upwardly revised 0.9% gain, growth was observed in several categories, such as car dealerships and furniture stores. However, spending was down among only a handful of categories, including home improvement stores and electronics retailers.
Even after factoring in July's 0.2% monthly increase in consumer prices, retail sales were still up a healthy 0.3% last month. Online sales also saw a 0.8% increase, coinciding with Amazon's Prime Day sale. On the other hand, restaurants and bars experienced a decline in sales, extending an unusually weak period of sales growth.
The latest Producer Price Index, which measures the prices businesses pay their suppliers, surged 0.9% in July from the prior month, with an annual rate of 3.3%. This increase suggests that businesses are facing cost pressures, particularly due to tariffs imposed by President Donald Trump. Economists, however, are uncertain about the long-term impact of tariffs on consumer inflation.
To manage tariff cost pressures, businesses have employed several strategies. They are diversifying suppliers and sourcing regions, optimizing product classifications to minimize tariff exposure, conducting financial health assessments of suppliers, renegotiating supplier terms, advance-buying inventory to hedge against future tariff increases, and leveraging technology to improve supply chain agility and margin control.
These strategies help companies absorb or mitigate tariff-driven costs, thereby reducing the need for large price increases that would fuel consumer inflation. Retail sales picked up across categories last month, suggesting that these efforts are having a positive effect on consumer spending.
Despite the ongoing trade war, consumers remain cautious but have not significantly cut back on spending. Economists will continue to monitor the situation closely to gauge the long-term impact of tariffs on consumer inflation and the overall health of the US economy.
References:
[1] Business Insider [2] CNBC [3] The Wall Street Journal [4] The New York Times
Businesses are implementing strategies to manage tariff cost pressures, such as diversifying suppliers and minimizing tariff exposure, to avoid increasing prices and fueling consumer inflation. These efforts seem to be positively impacting consumer spending, as retail sales have shown growth across categories last month. However, the ongoing trade war between the US and other countries continues to affect the economy, and economists are closely monitoring its impact on consumer inflation and the overall health of the US economy. The US economy's strength is demonstrated by the sustained momentum of consumer spending and businesses retaining workers, as shown in the low unemployment rate of 4.2%. The economy's resilience, with consumer spending contributing approximately 70% of economic output, is a topic of general news interest.
