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US retail sales post biggest drop in six months

[WASHINGTON] US retail sales unexpectedly fell in August, likely hurt by the impact of Hurricane Harvey on motor vehicle purchases, suggesting a moderation in consumer spending in the third quarter.

The Commerce Department said on Friday retail sales dropped 0.2 per cent last month, the biggest decline in six months. Data for July was revised to show sales increasing 0.3 per cent instead of the previously reported 0.6 per cent jump.

Economists polled by Reuters had forecast retail sales nudging up 0.1 per cent.

Motor vehicle sales tumbled 1.6 per cent last month, the biggest drop since January, after being unchanged in July.

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Harvey, which slammed Texas in the last week of August and unleashed unprecedented flooding in Houston, probably dented sales of automobiles.

Auto sales are, however, expected to get a boost from the replacement of flood-damaged vehicles. Overall retail sales increased 3.2 per cent in August on a year-on-year basis, pointing to underlying strength in domestic demand.

The Commerce Department said while it could not isolate the impact of Harvey on retail sales, it had received indications from companies that the hurricane had "both positive and negative effects on their sales data while others indicated they were not impacted at all." Excluding automobiles, gasoline, building materials and food services, retail sales fell 0.2 per cent last month after an unrevised 0.6 per cent increase in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Last month's drop suggested consumer spending could slow in the July-September period.

The weak retail sales report will probably do little to change expectations that the Federal Reserve will announce a plan to start shrinking its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its Sept 19-20 policy meeting.

The US central bank is expected to raise interest rates again only in December. It has increased borrowing costs twice this year.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.3 per cent annualized rate in the second quarter. That boosted GDP growth to a 3.0 per cent rate in the April-June period.

Despite sluggish wage growth, even as the labor market nears full employment, the fundamentals for consumer spending are solid. The stock market is near record highs and house prices have maintained their advance, increasing household wealth.