What Today's Retail Sales Report Tells You About the Economy

NEW YORK (TheStreet) -- The retail-sales report released Friday presented a Goldilocks number: Warm enough to stave off a reprise of last month's fears that the consumer recovery was stalling, but not hot enough to push the Federal Reserve to raise interest rates sooner than investors expect.

The Census Bureau said sales rose 0.6% in July, matching expectations. The big jump was the 1.5% gain in auto sales, with solid 0.7% gains in furniture sales and electronics. Excluding autos, sales rose 0.3%, also matching forecasts.

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The only "bad news was really good news: Gasoline sales fell 0.8% as prices fell, which simply puts money back in consumers' pockets to buy something else. The bureau also raised its estimate of July sales, saying they rose 0.3%. Initially, the government said sales were unchanged in July, prompting new fears about the recovery.

For short-term investors, that is probably the best outcome. The report is not enough to change the case for when the Federal Reserve may raise interest rates, likely next year, though yields on 10-year Treasuries were higher on Friday morning.

But the report points to a solid consumer recovery that is good news for automakers such as Ford (F) , General Motors (GM) and Toyota (TM) , as well as furniture companies such as La-Z-Boy (LZB) and Ethan Allen (ETH) .

"Consumer spending will be better than many thought after the July retail sales report," Regions Financial (RF) chief economist Richard Moody said. "Remember after that how people (though not me) were falling all over themselves to mark down their third-quarter forecasts? Sheesh." 

The report could set the stage for a return to a 4% annual growth clip in the fourth quarter, said Joel Naroff, president of Naroff Economic Advisors. And it strengthens the case for third-quarter growth estimates such as his 3.2% number or even 3.4% gross-domestic-product growth that was predicted by Moody's Analytics, while some Wall Street forecasts are lower.

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Going into next week's meeting of the Fed's Open Markets Committee, forecasts about when the Fed may boost rates are moving up. Bank of America Merrill Lynch this week moved its prediction to June 2015, from September. And it predicted the Fed would send a more hawkish signal as soon as next week's meeting of the FOMC, tweaking its post-meeting statement to delete language assuring that rates will stay near zero for a "considerable time." Merrill cited stronger-than-expected growth and a modest uptick in inflation.

"Pinpointing the exact timing of the first rate hike is more of a guess than a forecast," Merrill economist Ethan Harris wrote. "Nonetheless, the case for an earlier move has grown over the last several months."

Still, there's not a whole lot of movement on the advanced employment metrics Fed Chair Janet Yellen has been emphasizing since taking the job last winter. Involuntary part-time unemployment, while falling, still means 2 million more people are looking for full-time work without finding it than before the recession. And wage gains are still stuck in the 2% range, leaving people making few after-inflation gains.

That means the real news on rates will still come in jobs reports. It's less about the headline number now than the wage and part-time work statistics. But Yellen has made her values clear, and especially with Europe in trouble again, it's probably wise to assume that the Fed will move slowly on rates until events make it do otherwise.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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