US retail sales unexpectedly rose in August as a decline in receipts at auto dealerships was more than offset by strength in online purchases, suggesting that the economy remained on solid footing through much of the third quarter.

The report from the Commerce Department on Tuesday also showed retail sales were a bit stronger than initially thought in July. It combined with the decline in the unemployment rate last month to push against financial market expectations for a half-percentage-point interest rate cut from the Federal Reserve on Wednesday. US central bank officials were preparing to gather for a two-day policy meeting on Tuesday.

"There does not appear to be any reason for Fed officials to start out with a larger 50 basis points rate cut because whatever stress there is in the labour market, it isn't translating into weaker economic demand," said Christopher Rupkey, chief economist at FWDBONDS. "If this is an economy on the brink of recession, consumers certainly don't see it."

Retail sales increased 0.1% last month after an upwardly revised 1.1% surge 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, falling 0.2% after a previously reported 1.0% jump in July. Estimates ranged from a 0.6% decline to a 0.6% gain.

Retail sales increased 2.1% on a year-on-year basis in August. Online store sales rebounded 1.4% last month after falling 0.4% in July. Sales at gasoline stations dropped 1.2%, reflecting lower prices at the pump. Cheaper gasoline is likely freeing money for other spending.

Sales at sporting goods, hobby, musical instrument and book stores increased 0.3%. Building material and garden equipment store sales edged up 0.1%. But sales at food services and drinking places, the only services component in the report, were unchanged after rising 0.2% in July. Economists view dining out as a key indicator of household finances.

Furniture store sales fell 0.7%. Receipts at electronics and appliance outlets dropped 1.1%, while those at clothing retailers decreased 0.7%. Receipts at motor vehicle and parts dealers dipped 0.1%.

Financial markets saw a roughly 67% probability of a 50 basis points rate cut on Wednesday, little changed from before the retail sales data was published, according to CME Group's FedWatch Tool. The odds of a quarter-point rate reduction were around 33%, also unchanged from earlier.

The dollar was trading lower against a basket of currencies. US treasury yields rose.

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for more than a year, having raised it by 525 basis points in 2022 and 2023.

Most economists expect the central bank to cut interest rates by 25 basis points on Wednesday, arguing that the economy is not in enough distress to warrant the half-percentage-point reduction being anticipated by financial markets.

The unemployment rate fell to 4.2% in August after four straight monthly increases lifted it to a near three-year high of 4.3% in July. The jobless rate has been largely driven by increased labour supply from immigration, which is now slowing.

Layoffs remain low by historical standards, leaving the labour market in a position to continue generating steady wage gains that are supporting consumer spending and the overall economy. Economists are split on the implications that a declining saving rate could have on spending.

Some view the saving rate, which dropped to 2.9% in July and is near levels last seen in 2008, as portending softer spending ahead. They also expect precautionary saving to rise if the labour market deteriorates, which could weigh on spending.

Others, however, argued that the government was not fully capturing income earned by undocumented immigrants. They also pointed to strong household balance sheets against the backdrop of higher house and stock prices as supportive of future consumer spending.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.3% last month after rising by an upwardly revised 0.4% in July.

These so-called core retail sales were previously reported to have gained 0.3% in July. Core retail sales correspond most closely with the consumer spending component of gross domestic product. August's gain and the upward revision to July's data suggest that consumer spending, which accounts for more than two-thirds of the economy, stayed elevated in the third quarter.

Consumer spending accelerated in the second quarter, putting it on a higher growth path heading into the July-September quarter. Growth estimates for the third quarter are around a 2.5% annualised rate. The economy grew at a 3.0% pace in the second quarter.

  - Reuters