Is the American consumer as strong as August's retail sales suggest?

The American consumer keeps refusing to fade. On Wednesday morning, hours before the Federal Reserve’s rate decision, the Commerce Department reported that retail sales rose 1.2% in August, the largest monthly gain since spring and well above the 0.7% economists had forecast. It followed a soft July. On its face, that is a household sector spending freely into the fall.

Read the number a second time and the picture blurs. Gasoline prices climbed almost 4% during the month, inflation is proving stickier than the Fed hoped, and hiring has slowed to a crawl. Retail sales measure dollars spent, so a more expensive tank of gas registers as more spending even when the driver buys the same number of gallons. The question traders carried into the afternoon was how much of August’s strength is real demand and how much is just higher prices moving through the register.

Discretionary spending led the rebound

The bullish read starts with the part of the report that gas cannot explain. The control group, which strips out autos, gasoline, building materials and food services and feeds directly into GDP, rose 1.4% in August, roughly double the pace forecasters expected. That is the cleanest available gauge of underlying demand, and it accelerated.

The breadth helps the case. Michael Pearce of Oxford Economics described gains across most categories as decent, led by discretionary areas such as restaurants, electronics and recreation. Heather Long of Navy Federal Credit Union said households are still opening their wallets after a weak July. Sales excluding both autos and gasoline still rose more than a full percentage point, so the strength was not confined to the pump. When people keep spending on the things they can skip, it usually signals confidence rather than necessity.

Higher prices do some of the lifting

The skeptical read starts with what the dollar figure hides. Retail sales are not adjusted for inflation, and the government’s own release flags it. Prices rose 0.4% in August by the Consumer Price Index, with gasoline up 3.9% and the broader energy index climbing more than 2%. Gas stations were among the strongest categories in the sales report for that reason. Strip the price effect and part of the headline thins out.

Underneath, inflation is not cooperating. Core prices, which exclude food and energy, rose 0.3% for the month and 2.4% over the year, a touch hotter than Wall Street wanted and enough to revive worry that disinflation has stalled. The job market is the other cloud. Employers added just 73,000 positions in July, the smallest gain in about ten months, revisions erased a chunk of earlier payroll growth, and unemployment sat at 4.2% in what economists call a frozen market where few are hired and few are let go. A slower income engine tends to catch up with spending. There are signs shoppers are stretching, too: value chains and store brands, from warehouse clubs to private-label staples, keep taking share from name brands, the pattern that shows up when budgets tighten.

What the data shows

The tape was less sure. As of Tuesday’s close, consumer discretionary was the weakest corner of the S&P 500, its sector fund off 1.75% on the session, with consumer staples down 0.82%. Energy led every other sector, up 2.17%, the same fuel-price move that padded the retail number. Chipotle fell nearly 6%, among the day’s larger decliners in a restaurant group that August’s data supposedly favored. By Wednesday the S&P 500 traded near 7,616, the 10-year Treasury yield sat at 4.97%, and the volatility index held at a calm 16.7 as traders waited on the Fed.

What would settle it

The Fed answers part of it soon. The rate decision and fresh projections at 2 p.m. ET, followed by the chair’s press conference, will show how policymakers weigh a hot spending number against sticky prices and a soft labor market. A real-time read on the shopper arrives next Thursday, September 24, when Costco reports fiscal fourth-quarter results, one of the cleaner windows into whether households are still trading up or pulling back. Beyond that, the September jobs report will test whether hiring is stabilizing, and the next inflation prints, including the personal-consumption gauge the Fed watches most closely, will show whether higher prices are still doing the shopper’s spending for it.

For now, both are true. The consumer who spent 1.2% more in August is also the one paying more at the pump and facing a job market that has stopped growing. Which force wins out is what the fall will decide.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.