US retail sales were unexpectedly flat in September as households cut back on purchases of motor vehicles and other big-ticket items like electronics and appliances amid stubbornly high inflation and rapidly rising interest rates.
But consumers are not rolling over yet, with the report from the Commerce Department last Friday also showing a measure of underlying retail sales rising the previous month, thanks to strong wage gains and savings. These so-called core retail sales were also stronger than initially thought in August.
“Consumer staying power may be waning, but it’s showing few signs of breaking,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “Overall spending will continue to moderate as inflation persists and tighter monetary policy begins to weigh more meaningfully on consumption.”
The unchanged reading in retail sales last month followed an upwardly revised 0.4 per cent rise in August. Sales in August were previously reported to have gained 0.3pc. Retail sales increased 8.2pc on a year-on-year basis in September. Economists polled by Reuters had forecast sales would climb 0.2pc, with estimates ranging from as low as a 1.1pc decline to as high as a 0.8pc increase.
Overall spending is expected to continue as inflation persists and tighter monetary policy begins to weigh more meaningfully on consumption
Retail sales are mostly goods and are not adjusted for inflation. Soaring costs for rents and healthcare are squeezing budgets for many Americans, leading them to reduce spending on goods. The situation has been compounded by higher borrowing costs, which are making credit more expensive.
Economists saw no impact on monetary policy from the mixed retail sales report.
A survey from the University of Michigan showed consumer sentiment improved further in October, but inflation expectations deteriorated a bit as average national gasoline prices moved back up towards $4 per gallon after falling over the summer.
“The (retail sales) data don’t show the kind of overheating that would necessitate more aggressive rate hikes, nor the kind of rapidly deteriorating consumer spending that would encourage a pause,” said Will Compernolle, a senior economist at FHN Financial in New York.
The Federal Reserve (Fed) has raised its policy rate from the near-zero level in March to the current range of 3.0pc to 3.25pc as it battles inflation. A fourth straight 75-basis-point interest rate hike is expected next month after data last week showed inflation increasing strongly in September.
Retail sales also are slowing as spending shifts back to services. Sales at auto dealerships slipped 0.4pc last month, while receipts at service stations dropped 1.4pc.
Furniture store sales fell 0.7pc, while those at building material and garden equipment retailers decreased by 0.4pc.
Receipts at electronics and appliance stores declined by 0.8pc. There were also decreases in sales at hobby, musical instrument and bookstores, a sign that consumers were pulling back on discretionary spending.
But sales at clothing and general merchandise stores rose, as did those of online and mail-order retailers. Receipts at bars and restaurants, the only services category in the retail sales report, increased by 0.5pc.
“While consumers remain willing to spend, many families, especially those at the lower-to-median end of the income spectrum, are feeling increasingly constrained by elevated prices and rising interest rates,” said Gregory Daco, chief economist at EY-Parthenon in New York.
Stocks on Wall Street were trading lower as the earning season started with a drop in profits for big banks. The dollar rose against a basket of currencies. US Treasury prices fell.
Underlying strength
According to the National Retail Federation (NRF), consumers are spending on household priorities. The NRF says removing tariffs on Chinese goods and enacting immigration reforms to address worker shortages could complement the Fed’s efforts to tame inflation.
“As we enter the holiday season, shoppers are increasingly seeking deals and discounts to make their dollars stretch, and retailers are already meeting this demand,” NRF President Matthew Shay said. “However, the Biden administration must enact policy measures to relieve inflationary pressure and lower costs for American families.”
Excluding automobiles, gasoline, building materials and food services, retail sales increased by 0.4pc last month. Data for August was revised higher to show these core retail sales rising 0.2pc instead of being unchanged as previously reported.
Core retail sales correspond most closely with the consumer spending component of gross domestic product. The increase in September and the upward revision to August data left economists expecting that growth in consumer spending likely topped a 1.0pc annualised rate in the third quarter after increasing at a 2.0pc pace in the April-June quarter.
GDP is expected to have rebounded last quarter after two straight quarterly declines, as slowing domestic demand curbs imports and leaves a stockpile of unsold merchandise in warehouses. A third report from the Commerce Department showed business inventories increased by 0.8pc in August.
Published in Dawn, The Business and Finance Weekly, October 17th, 2022
