The Commerce Department says that retail sales rose 0.5 percent last month, the best showing since a 0.8 percent advance in March. And the government revised sales higher in the previous two months. That suggests the economy was not as weak as previously believed.
The report is the government's first read on consumer spending for the July-September quarter. Consumer spending is always closely watched because it accounts for 70 percent of economic growth. But the mood of the consumer is of particular interest to traders right now.
A batch of poor data and a gloomy outlook from the Federal Reserve this week have made many more nervous that the economy could fall back into a recession. The Dow has lost nearly 1,600 points, or more than 12 percent, since July 22.
High unemployment and a spike in gas prices have forced many consumers to be more cautious about spending. Their hesitation was a major reason the economy grew a meager 0.8 percent in the first six months of the year, the weakest growth since the recession officially ended. In June, consumers cut spending for the first time in 20 months.
Retail sales, which don't include spending on services, have been slowing since February. They grew only 0.1 percent in June, and when excluding car sales, retail spending was flat.
Back-to-school promotions helped boost sales in July at large chain stores. Target, Macy's and luxury chain Saks all reported gains that beat Wall Street expectations. But retailers worry that consumers may be thrifty when shopping this summer, sticking with basic necessities and holding out for sales. That's a popular strategy in tighter economies, but one that hurts stores' profits.
Many economists, including Federal Reserve Chairman Ben Bernanke, had thought the economic slowdown was mostly because of temporary factors, such as high gas prices and the parts shortage out of Japan.
But this week the Fed acknowledged that the economy's problems are deeper. Its statement suggested growth could be dismal for at least two more years.
As a result, the Fed took the unprecedented step of pledging to keep a key interest rate it controls at a record low near zero at least through mid-2013.
Private economists have been busy marking down their own forecasts. Analysts at JPMorgan Chase said they expect the just 1.5 percent growth in the July-September quarter, a full percentage point lower than their previous forecast.