- Retail sales increased 1.3% in October
- Core retail sales rose 0.7%; September sales are revised
- import prices fall for the fourth straight month
- Manufacturing output rose 0.1%; The previous month was revised down
WASHINGTON, Nov 16 (Reuters) – U.S. retail sales rose more than expected in October as households stepped up purchases of motor vehicles and a range of other goods, suggesting that consumer spending increased at the start of the fourth quarter, which could help the economy. .
Solid retail sales reported by the Commerce Department on Wednesday and signs of falling inflation raised cautious optimism that the economy could avoid an anticipated recession next year or experience only a mild decline.
While other data showed manufacturing production barely grew in October, the output of business equipment remained strong. Continued strength in consumer and business spending will keep the Federal Reserve on track to tighten monetary policy further, even as subdued inflation gives the US central bank room to scale back the size 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 increase,” said Eugenio Aleman, chief economist at Raymond James in St. Petersburg, Florida. “This will keep the Fed on guard and committed to continue increasing interest rates in order to slow down economic activity.”
Retail sales rose 1.3% last month after being unchanged in September. Economists polled by Reuters had forecast sales to rise 1.0%. Sales increased 8.3% on a year-on-year basis in October.
Retail sales are mostly goods and are not adjusted for inflation. With inflation cooling considerably in October, economists estimate real retail sales increased 0.9% last month.
California’s one-time tax refund, which saw some households receive as much as $1,050 in stimulus checks, likely helped sales in October. In addition, Amazon (AMZN.O) held the second Prime Day promotion last month.
The broad increase in sales in October was led by motor vehicles, with receipts at car dealers rebounding 1.3%, reflecting a significant improvement in supply.
Sales were also boosted by higher gasoline prices, with receipts at service stations up 4.1%. Online retail sales rose 1.2%. Furniture store sales increased by 1.1%. Sales in food and beverage services, the only service category in the retail sales report, increased 1.6%.
But electronics and appliance store sales fell 0.3%. There was also a decrease in receipts at general merchandise stores as well as sporting goods, hobby, musical instrument and bookstores. Clothing store sales were flat.
The National Retail Federation predicts holiday sales will increase between 6% and 8% this year. While that will drop from 13.5% in 2021, it will be well above the 4.9% average over the past 10 years.
The upbeat outlook for holiday shopping was somewhat tarnished by Target Corp (TGT.N) Wednesday’s forecast of a surprise drop in holiday-quarter sales. Retailers blamed inflation and “dramatic changes” in consumer behavior for the drop in demand for everything from toys to home furnishings.
Stocks on Wall Street mostly traded lower while the dollar slipped against a basket of currencies. US Treasury prices were largely high.
Consumers are resilient
Massive savings accumulated during the COVID-19 pandemic and strong wage gains amid a generally tight labor market helped consumers absorb higher prices and borrowing costs.
That support is expected to fade next year as tighter monetary policy dampens overall demand, weighing on the labor market and the economy. Low-income households are believed to have exhausted their pandemic savings.
Households also borrow to maintain spending. Data from the New York Fed on Monday showed total borrowing surged $351 billion in the third quarter.
The growing debt burden could be a drag on spending, especially among low-income households, although economists expect the impact to be limited.
“It’s not the level of debt that matters to consumers, it’s the monthly payments needed to finance the debt,” said Ryan Sweet, chief economist at Oxford Economics in West Chester, Pennsylvania. “Debt-to-service ratios and financial obligations are still among the lowest since the 1980s, a testament to the financial strength of households, in the aggregate.”
The Fed has raised its policy rate by 375 basis points this year from near zero to a range of 3.75%-4.00% as it battles rampant inflation in what has been the fastest cycle of rate hikes since the 1980s.
financial markets are betting that the US central bank will move down to a half-percentage-point rate hike at its December 13-14 policy meeting, according to the CME Group’s FedWatch tool.
Those expectations were bolstered by a separate report from the Labor Department 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. The data for September was revised upward to show this so-called core retail sales rising 0.6% instead of 0.4% as previously reported.
Core retail sales are most closely related to the consumer spending component of gross domestic products. The Atlanta Fed boosted its fourth quarter GDP growth estimate to an annualized rate of 4.4% from a rate of 4.0%.
The economy grew at a rate of 2.6% in the third quarter after contracting in the first half of the year.
But slowing manufacturing and inventory accumulation could limit growth this quarter. Business inventories rose 0.4% in September, the smallest gain since April 2021, another report from the Commerce Department showed.
A separate report from the Fed showed manufacturing output rose 0.1% in October, with business equipment output up 0.8%.
“We could be in for a ‘soft landing’,” said Paul Ashworth, chief North American economist at Capital Economics.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao
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