​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 partially boosted by higher prices, the broad increase underscored the economy’s continued resilience despite mounting headwinds. Economists upgraded their gross domestic product estimates for the third quarter.

“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 July.

Sales increased 5.0% on a year-over-year basis.

Adjusted for inflation, economists estimated monthly sales rose only 0.2%. Receipts at auto dealerships increased 0.5% after advancing 1.7% in July. That 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% after rising 0.6% in July.

“Consumers may be accelerating the timing of their purchases to get under the wire before tariff-related price hikes fully kick in,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.

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.

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 GDP.

Economists estimated core retail sales rose 0.4% when adjusted for inflation. The Atlanta Fed raised its third-quarter GDP growth estimate to a 3.4% annualized rate from a 3.1% pace earlier. The economy grew at a 3.3% rate last quarter.

Stocks on Wall Street slipped ahead of the Fed’s rate decision and summary of new economic projections from policymakers. The dollar fell against a basket of currencies. U.S. Treasury yields rose.

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

The Trump administration has argued that tariffs would be paid for exporting countries. But that has not been supported by data and signs point to inflation accelerating in the months ahead.

A separate report from the Labor Department’s Bureau of Labor Statistics showed import prices increased for a second straight month in August, driven by higher costs for consumer and capital goods as well as motor vehicles.

“The lack of any substantial decline in import prices given the surge in the effective tariff rate to roughly 15-16% suggests that those additional costs are being borne nearly entirely by U.S. businesses and consumers,” said Michael Hanson, an economist at J.P. Morgan.

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.

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

“Households no longer hold excess liquid assets, and falls in home prices are offsetting some of the positive wealth effect from rising stock prices,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. “They also are much more worried than usual about losing their jobs, suggesting that discretionary spending will struggle.”

While a third report from the Fed showed an unexpected 0.2% rise in factory production in August amid a rebound in motor vehicle production, tariffs continued to cast a shadow over the manufacturing sector. Output eased 0.1% in July. A U.S. appeals court last month ruled most of the tariffs were illegal.

“While tariff rates haven’t moved all that much in recent weeks, the administration looks to still be fine-tuning trade policy between different country-specific trade deals and product-specific tariffs that are still on the table,” said Shannon Grein, an economist at Wells Fargo.

“There’s also the pending Supreme Court ruling around the legality of universal tariffs likely to come in November.”