Published on October 17, 2023.
In a remarkable show of resilience, American consumers powered retail sales to a surprising 0.7% growth in September, outperforming the Dow Jones estimate of 0.3%. This strong performance, despite concerns of a weakening economy and rising interest rates, has left analysts astounded.
The advance report by the Commerce Department, released on Tuesday, revealed that gas station sales played a crucial role in driving this robust figure, surging by 0.9% as pump prices accelerated. Even when excluding auto sales, the increase was substantial at 0.6%, surpassing the forecast of 0.2%. The “control group,” which excludes categories such as auto dealers, gas stations, office supply stores, mobile homes, and tobacco stores, and is crucial for GDP calculations, also rose by 0.6%.
These figures are not adjusted for inflation, indicating that consumers managed to outpace price increases. This is confirmed by the recent consumer price index report, released last week, which showed a 0.4% increase in headline inflation for September.
Year-over-year data paints an impressive picture, with retail sales surging by 3.8%, compared to the CPI’s 3.7% increase. The report’s release prompted an uptick in Treasury yields, while stock market futures experienced additional losses.
David Russell, the global head of market strategy at TradeStation, noted, “The U.S. consumer cannot stop spending. All three retail sales reports for Q3 were above estimates, putting us on track for a robust GDP number later this month. This also provides the Federal Reserve with no reason to relax its policy, which continues to push the 10-year Treasury yield toward 5%.”
The remarkable performance of retail sales in September was broad-based. Notably, miscellaneous store retailers saw a significant rise of 3%, and online sales climbed by 1.1%. Motor vehicle parts and dealers witnessed a 1% increase, while food services and drinking establishments experienced a 0.9% growth, leading all categories with a yearly increase of 9.2%.
Only a few categories saw declines, with electronics and appliances stores, as well as clothing retailers, each experiencing a 0.8% decrease during the month.
The retail sales report is a critical factor in the Federal Reserve’s considerations for the future of monetary policy. While the market widely expects the Fed to have concluded its rate hikes for this cycle, the unexpectedly robust consumer performance has added complexity to the equation.
In other economic news on Tuesday, the Fed reported that industrial production increased by 0.3% in September, surpassing the 0.1% estimate. Additionally, capacity utilization, representing the level of potential output, edged up to 79.7%, 0.1 percentage point above the estimate. The Commerce Department also reported a 0.4% increase in total inventories for August, slightly exceeding expectations.
All eyes are now on Federal Reserve Chair Jerome Powell’s speech scheduled for Thursday in New York, an event that the market will closely monitor for insights into the future of interest rates. The Federal Open Market Committee’s upcoming meeting is set for October 31-November 1.
While it’s largely expected that the FOMC will maintain current rates, future data strength could influence their decisions. Following the retail sales report, the implied probability of a December rate hike increased to about 43%, up from 34% on the previous day, according to the CME Group’s gauge of futures market pricing.
Richmond Fed President Thomas Barkin shared concerns that some of the robust data doesn’t align with his on-the-ground observations, suggesting that demand may be slowing.
Consumer challenges may arise towards the end of the year. Employment growth is expected to slow, though it has defied expectations so far. Credit card balances are rising, with Bank of America reporting a 0.2% monthly gain in September balances.
