U.S. retail sales surprise to upside in strong boost to economy

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales unexpectedly increased in August, likely boosted by back-to-school shopping and child tax credit payments from the government, which could temper expectations for a sharp slowdown in economic growth in the third quarter.

The surprise rebound in retail sales reported by the Commerce Department on Thursday defied slumping consumer confidence. Sales were driven by a surge in online purchases, which offset a continued decline at auto dealerships. But sales in July were much weaker than initially estimated.

Economists have been downgrading their gross domestic product estimates for the current quarter, citing plunging motor vehicle sales, which are the result of an acute inventory shortage, and a flare-up of COVID-19 infections fueled by the Delta variant of the coronavirus.

"U.S. consumption is not slowing as quickly as it appeared a month ago despite the fading stimulus, and the Delta variant did not much affect the industries feeding into retail sales," said Chris Low, chief economist at FHN Financial in New York. "The economy continued to hum in August."

Retail sales rose 0.7% last month. Data for July was revised down to show retail sales declining 1.8% instead of 1.1% as previously reported. Economists polled by Reuters had forecast retail sales would drop 0.8%. Sales increased 15.1% from a year ago and are 17.7% above their pre-pandemic level.

They are holding up even as spending is shifting back from goods to services like travel and entertainment. Retail sales are mostly goods, with services such as healthcare, education, travel and hotel accommodation making up the remaining portion of consumer spending.

Online retail sales rebounded 5.3% after tumbling 4.6% in July. Most school districts started their 2021-2022 academic year in August, with in-person learning resuming after last year's shift to online classes because of the pandemic.

Qualifying households in mid-July started receiving money under the expanded child tax credit program, which will run through December. Sales at clothing stores edged up 0.1% last month. There were strong gains in receipts at building material and furniture stores.

But sales at auto dealerships tumbled 3.6% after declining 4.6% in July. An ongoing global shortage of microchips is forcing has automakers to cut production.

The semiconductor crunch, which has been worsened by the latest COVID-19 wave, is also causing shortages of some electronic goods.

There is also congestion at ports in China. Sales at electronics and appliance stores fell 3.1%. There was also a decrease in receipts at sporting goods, hobby, musical instrument and book stores.

With coronavirus infections surging, the flow of traffic to restaurants and bars ebbed, keeping sales flat. Restaurants and bars are the only services category in the retail sales report.

Excluding automobiles, gasoline, building materials and food services, retail sales rebounded 2.5% last month after a downwardly revised 1.9% decrease in July.

These so-called core retail sales correspond most closely to the consumer spending component of GDP. They were previously estimated to have dropped 1.0% in July.