FILE PHOTO: Shoppers browse a Walmart Supercenter, in Secaucus, New Jersey, U.S. April 3, 2025. REUTERS/Siddharth Cavale/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales increased more than expected in August as consumers bought a range of goods and dined out, but a weakening labor market and rising prices because of tariffs pose a downside risk to continued strength in spending.

The third straight month of solid gains in sales reported by the Commerce Department on Tuesday is unlikely to prevent the Federal Reserve from cutting interest rates on Wednesday, given the widening cracks in the labor market. It could, however, urge caution against aggressive rate cuts, economists said.

Though sales were probably partially boosted by higher prices, the broad increase underscored the economy's continued resilience despite mounting headwinds.

"The American consumer appears to be in good spirits. That’s good news for the economy, but it may heighten debate over how aggressively the Fed needs to cut rates," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

"The Fed's main concern right now is a softening labor market, but more data like this could convince the committee that it can proceed cautiously on rates."

Retail sales rose 0.6% last month after an upwardly revised 0.6% advance in July, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, rising 0.2% following a previously reported 0.5% gain in June.

Sales increased 5.0% on a year-over-year basis. Receipts at auto dealerships rose 0.5% after advancing 1.7% in July. The increase likely reflected higher prices as manufacturers reported a decline in units sold.

Clothing store sales advanced 1.0%, while receipts at sporting goods, hobby, musical instrument and book stores increased 0.8%. Food and beverage stores sales rose 0.3%. Receipts at service stations increased 0.5% amid higher gasoline prices. The government reported last week that consumer prices increased by the most in seven months in August, with strong rises in the costs of food and apparel among other products.

Online sales shot up 2.0%, likely boosted by back-to-school shopping, after increasing 0.6% in July. Sales at electronics and appliance stores rose 0.3%. But receipts at furniture outlets fell 0.3%, while sales at building material and garden equipment retailers edged up 0.1%.

Households also boosted spending at restaurants and bars. Sales at food services and drinking places, the only services component in the report, increased 0.7% after slipping 0.1% in July. Economists view dining out as a key indicator of household finances.

"Discretionary restaurant spending suggests the consumer is on stable footing, minimizing recession risk," said Jeffrey Roach, chief economist at LPL Financial.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.7% last month after an unrevised 0.5% advance in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

The dollar fell against a basket of currencies. U.S. Treasury yields rose.

PULLBACK IN SPENDING IS EXPECTED

The Fed is expected to deliver a quarter-percentage-point interest rate cut on Wednesday to support the labor market. The U.S. central bank paused its easing cycle in January because of uncertainty over the inflationary impact of import duties.

The struggling labor market, characterized by meager job gains and rising unemployment as companies hold off hiring because of an uncertain economic outlook, poses a risk to consumer spending.

"Households still generally have the means to spend, but growing concerns over the labor market suggest that we will likely see a pullback in the pace of spending growth for the remainder of the year," said Sam Bullard, a senior economist at Wells Fargo.

A survey from the New York Fed on Monday showed the year-over-year increase in household spending, unadjusted for inflation, slipped in August to the lowest level in nearly 4-1/2 years.

Still, more people continued to buy electronics, home appliances, furniture, homes and vehicles as well as undertake home repairs and go on vacations.

Similarly, a Bank of America Institute survey found lower-income households were being impacted the most by the labor market weakness, with their after-tax wages and salaries increasing in August at the slowest pace since 2016.

Bank of America Institute also noted that spending growth was the weakest among younger people and those born between 1965 and 1980, commonly referred to as Generation X.

"The weakening labor market appears to be impacting younger people, particularly because changing jobs no longer results in as big of a pay bump," it said.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)