U.S. retail sales recorded their biggest increase in seven months in July as consumers boosted purchases of motor vehicles as well as discretionary spending, suggesting the economy continued to gain momentum early in the third quarter.

The Commerce Department said on Tuesday that retail sales jumped 0.6 percent last month. That was the largest gain since December 2016 and followed June’s upwardly revised 0.3 percent rise.

Economists polled by Reuters had forecast retail sales increasing 0.4 percent in July after a previously reported 0.2 percent decline.

May’s retail sales were also revised up to show no change instead of the previously reported 0.1 percent dip. Retail sales increased 4.2 percent in July on a year-on-year basis.

Excluding automobiles, gasoline, building materials and food services, retail sales surged 0.6 percent last month after an upwardly revised 0.1 percent gain in June. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have dipped 0.1 percent in June.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.8 percent annualized rate in the second quarter. That boosted GDP growth to a 2.6 percent rate in the April-June period.

With wage growth remaining stubbornly sluggish despite the labor market being near full employment, Americans have been dipping into their savings to fund spending, a trend that economists say is unsustainable.

The savings rate has dropped to 3.8 percent in the second quarter of this year from a rate of 6.2 percent in the second quarter of 2015. Low savings and tepid wage growth suggest households would need to borrow to maintain spending.

Motor vehicle sales climbed 1.2 percent in July, the biggest rise since December 2016, after advancing 0.9 percent in June. Faced with a huge inventory of unsold cars, auto dealerships are resorting to hefty discounts to attract buyers. Prices for motor vehicles recorded their biggest drop in nearly eight years in July and have decreased for six straight months.

Receipts at service stations fell 0.4 percent in July.

Sales at building material stores increased 1.2 percent last month after rising 1.1 percent in June. Receipts at electronics and appliance stores slipped 0.5 percent. Sales at clothing stores fell 0.2 percent after rising 0.7 percent in June.

Department store retailers are struggling with falling traffic in shopping malls and increased competition from Amazon.com and other online retailers.

Sales at online retailers jumped 1.3 percent in July, the largest gain since December 2016, likely buoyed by Amazon’s Prime Day promotion. Receipts at restaurants and bars increased 0.3 percent and sales at sporting goods and hobby stores also rose 0.3 percent.

Source: cnbc economy
US retail sales post biggest gain in seven months