After declining for three straight months, consumers increased their spending in July. The Census Bureau reported that retail sales rose 0.8 percent in July, reversing the 0.7 percent decline the month before. In general, an anxious American population had begun to pull back a little; with these numbers, it suggests that consumers are returning to modest gains in spending – at least for the month of July. Some of this gain could be pent-up demand, following three months of hesitancy toward spending.

Gasoline station sales had led the decline in previous months, but in July, we started to see some price increases. As a result, gasoline stations saw increase spending of 0.5 percent for the month. The largest gains, though, were seen in sporting goods and hobbies (up 1.6 percent), nonstore retailers (up 1.5 percent), furniture and home furnishings (up 1.1 percent), building materials (up 1 percent), electronics and appliances (up 0.9 percent), clothing and accessories (up 0.8 percent), and food service and drinking places (up 0.8 percent). As such, this was a broad-based increase in retail sales for the month.

Increased consumer spending should bode well for additional manufacturing production, assuming these gains can be sustained moving forward. Year-over-year retail sales are now up 4.1 percent. This is up from 3.5 percent in June but still lower than the 6.8 percent rate observed in December. This suggests that there is still more room for spending to grow, even as these figures are a positive sign.

With that said, the latest data from the National Federation of Independent Business shows continued weakness in the market for smaller firms. The NFIB Small Business Optimism Index declined slightly from 91.4 in June to 91.2 in July. The net percentage of firms saying that the next three months are a good time to expand was unchanged at 5 percent. As with past months, concerns about the economy were the primary factor for those saying that it was not a good time, with a sizable percentage also suggesting the political climate.

In contrast to the retail sales figures above, respondents to the NFIB survey were reporting lower earnings and sales for their businesses. Expectations for both were negative for the next three months. On the other hand, employment expectations strengthened a little, up from a net 3 percent to 5 percent. This suggests a slight pickup in net job creation. Likewise, 21 percent plan to increase capital spending over the next three to six months, unchanged from June but lower than the 25 percent who said this in April.   

The NFIB numbers suggest continued softness among small businesses, with employment and capital investment the only bright spots. Slower sales are chipping away at confidence. Small business owners are also worried about the political environment. The single most important problem this month was a tie between “taxes” and “government regulations and red tape,” which were both cited by 21 percent of those taking the survey. Poor sales were noted by 20 percent.  This indicates that uncertainties related to the “fiscal cliff,” the upcoming election, and economic conditions are first-and-foremost on their minds.

Chad Moutray is chief economist, National Association of Manufacturers.

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