The Commerce Department said retail sales advanced to a seasonally adjusted $304.28 billion, while sales outside of the auto sector grew by a smaller 0.2 percent to $228.45 billion. Both the overall figure and sales excluding autos were precisely in line with Wall Street expectations.
July's sales increase was led by a 4.2 percent gain in auto sales as consumers continued to take advantage of zero percent financing deals. Auto sales posted the same gain in June.
Many economists saw the data as positive news and said it should lay to rest any expectations that the Fed will lower interest rates.
"It's a reminder that the consumers are not dead yet," said Christopher Low, chief economist at FTN Financial in New York. "This suggests that consumers are spending happily albeit they are spending on cars at the expense of everything else."
The sizable increase in car sales outweighed cutbacks elsewhere. Shoppers trimmed spending on furniture and home furnishings, electronics and appliances, building and garden supplies, and clothes, a sign that consumers have grown more cautious amid stock market turmoil and economic uncertainties.
Economists worry that a wave of accounting scandals that has shaken Americans' confidence in corporate leaders, the roller-coaster stock market and a sluggish job market could chill consumers' willingness to spend in the months ahead, something that would slow economic growth.
The recovery has lost considerable momentum from the beginning of the year. The economy grew by just 1.1 percent in the spring, down from a brisk 5 percent pace in the first quarter.
Some economists are predicting lackluster growth for the second half of this year as well.
The July sales figures were boosted by the fact that automakers, worried about sales, recently brought back generous incentives, including free-financing deals, to lure buyers. Sales at automobile dealers rose by 4.2 percent in both June and July.
Another factor contributing to higher overall retail sales in July was a 2.7 percent increase in sales at gasoline stations. That followed a 0.1 percent dip in June.
Shoppers also spent more at health and beauty stores, pushing sales up by 1.1 percent in July, after a 0.3 percent advance. And, sales at bars and restaurants went up 1 percent last month, on top of a 0.7 percent gain in June.
At department stores and other general merchandise outlets, sales edged up 0.3 percent, down from a 1.1 percent rise in June.
Shoppers were more selective when it came to buying other goods.
Sales at furniture and home furnishing stores dropped 1.4 percent in July, the biggest decline since September. In June, such sales decreased by 1.1 percent.
At electronics and appliances stores, sales fell 1 percent, the worst showing since January, and nearly erasing all of the 1.1 percent increase reported in June.
Sales of building materials and garden supplies went down by 1.2 percent in July, the largest decline since December. That followed a 0.6 percent increase in June.
At clothing and other accessory stores, sales fell by 1.3 percent in July, down from a 2.5 percent advance the month before.