The report from the Commerce Department on Tuesday, which showed sales for May were higher than initially estimated, did not change expectations that the Federal Reserve could start cutting interest rates in September amid cooling inflation. It also helped to assuage fears of a sharp slowdown in the economy.

"The economy is in pretty good shape, there are signs of softness around the edges where low and moderate income consumers are pulling back ... but openhanded spending by affluent consumers is keeping the economy as a whole moving forward," said Bill Adams, chief economist at Comerica Bank.

The unchanged reading in retail sales last month followed an upwardly revised 0.3% gain in May, 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, would fall 0.3% after a previously reported 0.1% gain in May. Retail sales increased 2.3% on a year-on-year basis in June.

Momentum has, however, slowed from the 7.7% gain logged in January 2023. After a period of high inflation, households are trading down and seeking cheaper alternatives, as evident in earnings reports from major retailers and manufacturers.

PepsiCo (PEP.O) CEO Ramon Laguarta said last week that lower-income consumers were "stretched" and "strategizing a lot to make their budgets get to the end of the month."

Online store sales jumped 1.9% last month, adding to a 1.1% increase in May. Sales at gasoline stations dropped 3.0%, reflecting lower prices at the pump. Cheaper gasoline is likely freeing money for other spending.

Building material and garden equipment store sales increased 1.4%. Sales at food services and drinking places, the only services component in the report, gained 0.3% after rising 0.4% in May. Economists view dining out as a key indicator of household finances.

Furniture store sales rose 0.6%. Receipts at electronics and appliance outlets rose 0.4%, while those at clothing retailers increased 0.6%. Sales at sporting goods, hobby, musical instrument and book stores dipped 0.1%.

Receipts at motor vehicles and parts dealers declined 2.0%. A cyberattack at software systems provider CDK hit operations at several auto dealerships during the second half of June.

'RESILIENT PACE'

Retail sales excluding automobiles, gasoline, building materials and food services surged 0.9% last month after rising by an unrevised 0.4% in May. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Economists now estimate that consumer spending, which accounts for more than two-thirds of the economy, grew at a 2.0% annualized rate in the second quarter. They had previously forecast consumer spending would match the first quarter's 1.5% rate. Growth estimates for the April-June period are around a 2% rate. The economy grew at a 1.4% rate in the first quarter.

"The all-important U.S. consumer, while increasingly discerning regarding purchases, continues to spend at a resilient pace," said Quincy Krosby, chief global strategist at LPL Financial. "This report doesn't negate expectations that the Fed will cut rates at its September 18 meeting, unless of course inflation-related data releases indicate an uptick in prices."

Nonetheless, the outlook for consumer spending is less favorable. Most households have run down the excess savings accumulated during the COVID-19 pandemic and are carrying a lot of credit card debt, which is becoming more expensive as interest rates remain elevated.

Wage growth is also moderating as the labor market eases. The pace of consumer spending, however, remains sufficient to keep the economic expansion on track.