U.S. retail sales rise solidly; fourth-quarter GDP estimates raised

U.S. retail sales rose more-than-expected in October as households increased purchases of motor vehicles and a range of other goods, suggesting that consumer spending was picking up early in the fourth quarter, which could help support the economy.

Solid retail sales reported by the Commerce Department on Wednesday and signs of slowing inflation prompted cautious optimism that the economy could avoid an expected recession next year or experience only a modest slowdown.

While other data showed that manufacturing output grew little in October, office equipment output remained strong. Continued strength in consumer and corporate spending will keep the Federal Reserve on course to further tighten monetary policy, although easing inflation gives the Federal Reserve room to reduce the magnitude of its rate hikes.

“This is not what the Fed wants to see, but it comes at a time when inflation numbers are starting to improve,” said Eugenio Aleman, chief economist at Raymond James in St. Petersburg, Fla.

“This will keep the Fed on the alert and committed to raising rates further to slow economic activity.”

Retail sales rose 1.3% last month after remaining flat in September. Economists polled by Reuters had forecast sales to rise 1.0%. Revenue rose 8.3% year over year in October.

Retail sales consist primarily of merchandise and are not adjusted for inflation. As inflation eased significantly in October, economists estimate real retail sales rose 0.9% last month.

One-time tax refunds in California, which gave some households stimulus checks of up to $1,050, may have helped prop up sales in October. Additionally, Amazon held a second Prime Day promotion last month.

The broad rise in October sales was led by motor vehicles, with car dealership revenue slipping 1.3%, reflecting a sharp improvement in supply.

Sales were also boosted by higher gasoline prices, with service station revenue up 4.1%. Online retail sales increased by 1.2%. The turnover of the furniture stores increased by 1.1%. Foodservice sales, the only service category in the retail sales report, rose 1.6%.

However, sales of electronics and household appliances fell by 0.3%. There were also declines in general stores, as well as sporting goods, hobby, musical instrument and bookstores. Clothing store sales remained flat.

The National Retail Federation is forecasting holiday sales growth of between 6% and 8% this year. While that would be a decrease from 2021’s 13.5%, it would be well above the 4.9% average over the past 10 years.

The optimistic outlook for holiday shopping was somewhat dampened by Target Corp’s forecast on Wednesday of a surprise decline in holiday quarter sales. The retailer blamed inflation and “dramatic shifts” in consumer behavior for a drop in demand for everything from toys to home furnishings.

Wall Street stocks mostly traded lower as the dollar slipped against a basket of currencies. US Treasury bond prices were mostly higher.

Resilient consumers

Massive savings accumulated during the Covid-19 pandemic and strong wage increases amid a tight labor market have generally helped consumers weather higher prices and borrowing costs.
This support is expected to fade over the next year as tighter monetary policy dampens aggregate demand and weighs on the labor market and the economy. Low-income households are believed to have already used up their pandemic savings.

Households also borrow to sustain spending. Data from the New York Fed on Monday showed total debt rose by $351 billion in the third quarter.

The growing debt burden could pose a drag on spending, particularly among low-income households, although economists expect the impact to be limited.

“It’s not the amount of debt that matters to consumers, it’s the monthly payments required to fund the debt,” said Ryan Sweet, chief economist at Oxford Economics in West Chester, Pennsylvania. “The ratio of debt service to financial commitments remains among the lowest since the 1980s, a testament to the strength of household finances overall.”

The Fed has raised interest rates by 375 basis points this year from near zero to a range of 3.75% to 4.00% as it battles rampant inflation in its fastest rate hike cycle since the 1980s.

According to CME Group’s FedWatch tool, financial markets are betting that the US Federal Reserve will resort to a half a percentage point rate hike at its December 13-14 meeting.
Those expectations were bolstered by a separate Labor Department report on Wednesday that showed import prices fell for the fourth straight month in October.

Excluding autos, gasoline, building materials and food services, retail sales rose 0.7% last month. September data has been revised upwards to show that so-called core retail sales rose 0.6% instead of 0.4% as previously reported.

Core retail sales correspond most closely to the consumer spending component of gross domestic product. The Atlanta Fed raised its GDP growth estimate for the fourth quarter to 4.4% annualized from 4.0%.

The economy grew 2.6% in the third quarter after contracting in the first half of the year.
But a slowdown in production and inventory builds could limit growth this quarter. Business inventories rose 0.4% in September, the smallest increase since April 2021, another Commerce Department report showed.

A separate Fed report showed that manufacturing output rose 0.1% in October, while office equipment output rose 0.8%.

“We may be in for a ‘soft landing’ after all,” said Paul Ashworth, chief economist for North America at Capital Economics.