Our economy thrives or dies on consumer spending, about two-thirds of all economic activity in America is from consumers. For this reason, retail sales data is an extremely important indicator of economic health and growth. September is a key month for this data because it is the month where the Fed began its interest rate cutting campaign, so it will be interesting to see how consumers responded to the moderate easing of financial conditions.
Retail sales grew 0.4% in September, beating economist expectations of 0.3% and bringing us to a year over year increase of 1.7%. Core retail sales, retail sales excluding cars, gas, and food services, rose 0.7% in September and are up 3.7% year over year. This increase in consumer spending likely stems from the decrease in gas prices which gave consumers more flexibility to spend elsewhere. On average, gasoline prices dropped 12 cents a gallon from August to September. Spending at food services locations increased 1% in September, grocery sales increased 1%, clothing sales increased 1.5%, other retailers increased 4%, and online sales increased 0.4%.
These numbers are really solid, and they add confidence to the idea that our economy is strong at the moment. Lucia Mutikani of Reuters wrote, “Spending and the overall economy are being underpinned by solid income growth, ample savings as well as strong household balance sheets. Though labor market momentum has slowed, layoffs remain historically low, supporting wage gains.” Mutikani contests that consumer spending is strong because financial situations are improving across the nation, wages are increasing and so is saving. This is also the belief of David Russell, head of market strategy at TradeStation, “Real wage growth and underlying demand for goods and services are overshadowing negative sentiment. The economy continues to accelerate thanks to the U.S. consumer, and may improve further as lower fuel prices kick in. Today’s numbers make a recession look even less likely. Santa could be coming to town this year. In fact, he might already be here.” The economy’s strength should solidify the Fed only cutting rates by 25 basis points on November 7th.
The surprising part of these numbers is that the consumer seems to be comfortable spending, even though consumer sentiment is quite low at the present. The most prominent gauge of nationwide consumer sentiment, the University of Michigan consumer sentiment index, is still deep in pessimism territory as consumers have worries about inflation and the upcoming election. It seems however, that increases in wage growth and decreases in fuel prices have overpowered inflation worries. Jim Baird, Chief Investment Officer of Plante Moran Financials Advisors wrote that this pessimism “doesn’t appear to be translating to an unwillingness or inability of consumers to spend.” With inflation decreasing and getting closer to the Fed’s target rate of 2%, as well as decreasing interest rates, we should see increases in both consumer spending and consumer sentiment. Consumer sentiment should also see a boost due to a strong labor market, hiring increased ahead of expectations in September and layoffs are near all-time lows.
The next two months will be important months to watch retail sales data for two reasons, (1) the election, (2) holiday spending. Consumer sentiment is low right now because of hesitancy stemming from the upcoming election. Afterwards, we will be able to see the fiscal path forward and have more confidence in how to act. November and December are also holiday months, this is an important time to watch for trends in consumer spending. Sabrina Escobar of Barron’s writes, “In fact, with both inflation and interest rates heading lower, it shouldn’t be too long before sentiment starts improving... That could be a boon to retailers ahead of the all-important holiday season. The most recent holiday forecast by the National Retail Federation predicts sales will rise by 2.5% to 3.5% this season, moderating slightly from last year’s nearly 4% increase.”
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