US retail sales rose 1.3% in October, the Census Bureau reported Wednesday. That’s the biggest monthly gain since February and better than the 1% economists had expected. Consumer spending was flat in September.
And N.C. State economist Dr. Mike Walden warned the surge shows the Federal Reserve that the economy is not slowing as the Fed wants.
“October retail sales were surprisingly strong. Sales were up even after adjusting for inflation and seasonal impacts. In contrast, sales were flat in September,” Walden told WRAL Tech Wire. “Among retail items, sales gains were strongest for gas, auto, furniture, and restaurant meals.”
So what’s happening?
“It could be that consumers are making their holiday purchases early, meaning we may see less robust sales in November and December. Or, it may be that households are tapping into the estimated $1 trillion in savings generated from the various Covid stimulus programs,” he explained.
Mike Walden (NCSU photo)
But the bottom line could mean higher interest rates.
“Either way, retail sales don’t yet show a consistent slowing, which is what the Federal Reserve wants to see,” Walden said. “I think the new retail sales numbers increase the likelihood of more Federal Reserve interest rate hikes, although they may be smaller than the recent 0.75 % points hikes.”
Walden is not alone in his concerns.
“Even after adjusting for inflation, consumers are spending more,” Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a note. “It is tempting to cheer on the ‘resilience’ of the consumer, but the staying power of spending gives businesses no incentive to forgo price increases, thereby making the task of getting inflation in check more difficult for policymakers.”
Good news on inflation: Wholesale price increase is less than forecast
The trends
Retail sales, which are not adjusted for inflation, were up 8.3% for the 12 months ended in October, slightly down from September’s 8.6%.
For much of the year, despite short-term spikes in gas prices and decades-high inflation, consumer spending has remained robust.
The October retail sales report shows the pent-up desire to shop that was caused by the pandemic remains strong, said Eugenio Aleman, chief economist for Raymond James.
“The fact that they were limited in their consumption alternatives before, for almost three years, is having a big impact on consumers’ decisions to continue to spend,” Aleman said.
But to fund that spending, which has started to become more heavily geared toward experiences versus goods, consumers have leaned more heavily on debt. The New York Federal Reserve reported Tuesday that consumer credit card balances grew by 15% year over year in the third quarter — the highest in more than 20 years.
But as the central bank hikes interest rates in its efforts to bring down stubbornly high inflation, that takes a toll on consumers, said Gregory Daco, chief economist for EY Parthenon. Consumer sentiment has fallen in recent months.
“It’s becoming increasingly evident that households’ budgets are being stretched by persistently elevated inflation, forcing many to dip into their savings and use credit to finance outlays,” he wrote Wednesday. “This is by no means sustainable, especially for families at the lower-to-median end of the income spectrum. Hence, while aggregative excess savings remain elevated around $1.5 trillion, we expect we will soon see a notable pullback in consumer spending activity under the weight of inflation and elevated interest rates.”
Wall Street welcomes back ‘greed’ as investors turn back to stocks
The October retail sales report comes amid a slew of consumer-related economic data and retailer earnings reports ahead of the holiday shopping season.
Two key inflation gauges, the Consumer Price Index and the Producer Price Index both showed price increases have been cooling.
“The inflation relief consumers received in October that we saw in last week’s CPI report extended to this morning’s retail sales numbers,” said Scott Brave, head of economic analytics at Morning Consult.
While inflation appears to have peaked, consumers’ behaviors have shifted, Claire Tassin, Morning Consult’s retail and e-commerce analyst, said during an interview Wednesday.
“Everyone is more price sensitive lately,” she told Christine Romans, CNN Business’ chief business correspondent. “People are certainly changing the stores that they shop in, so I can absolutely see wealthier shoppers shopping at Walmart often, especially … to access some of those lower prices than maybe at other stores they would traditionally shop at.”
On Tuesday, Walmart reported its US sales had increased 8.2% last quarter from the year before. The discount retailer noted it was making “strong grocery share gains,” including from high-income households.
However, earlier on Wednesday, Target said its profit plunged 52% last quarter and revenue rose by just 3.4% as consumers started to feel the heat from inflation. The retailer warned of a sluggish holiday season ahead as shoppers hold out for bargains.
