Retail sales edged higher in October, increasing by 0.3%, which is softer than the expectations of a 0.5% increase for the month. The control group, which represents the best gauge of GDP impact, was up only 0.1% compared to a half-point increase expected. Revisions to prior results were also lower.
The slowdown in retail sales points to a consumer sector that has tightened its purse strings a bit, as the speed of the recovery continues to slow and the threat posed by COVID-19 reaccelerates.
Weaker retail results point to a consumer sector that’s becoming more cautious in its spending habits. Why? Weaker sales likely reflect several headwinds to consumer spending: the slowing recovery, the recent surge in nationwide COVID-19 cases, a shift in behavior and appetite for discretionary spending, and the reduction in fiscal support for sidelined workers.
The weakness of retail sales was fairly widespread, although the results continue to reflect the acceleration in the long-term trend away from in-person shopping and toward online commerce. Nonstore retailers posted a strong 3.1% gain for the month, sufficient to lift the year-on-year increase to nearly 30%. Those successful online retailers though have cannibalized other parts of the retail sector that continue to struggle with the headwind of changing consumer dynamics.
Among the hardest hit were clothing stores, likely impacted by the large number of consumers that work or attend school remotely. That may be creating the ultimate “casual day” flexibility for many Americans, reducing demand for newer, more current or stylish apparel.
Discretionary spending at sporting goods and hobby shops and bookstores also dipped sharply last month, also likely due to the ease of buying such goods online, constraints on many sports activities in parts of the country, and the pinch of slower income growth.
Ultimately, the story echoes the experience of retailers in the early days of the first COVID-19 wave. Surging COVID-19 cases pose a clear risk, as social-distancing measures are being reimposed across much of the country. Increased restrictions are likely to hinder consumer spending in the months ahead, particularly for brick-and-mortar stores and restaurants that rely on in-person shopping and dining respectively.
Attention has turned to Congress in recent weeks on news regarding an additional fiscal relief package, but there’s little indication of any meaningful progress on that front, despite some bipartisan support for some degree of stimulus. Without another meaningful fiscal package, many households, businesses, healthcare providers, and government entities are likely to feel the pinch in the coming months. That will not only be apparent for the retail sector but also poses a risk to the broad economy.
The U.S. economy remains on the road to recovery, but there are growing signs that the fuel for that recovery is running low. Recent promising developments on the vaccine development front suggest there’s a very bright light at the end of the tunnel that could provide a significant boost to the national mood and the economy sometime next year. Even so, the near-term risk presented by the rapid increase in COVID-19 cases, expanded restrictions on travel and gatherings, and the resulting negative economic consequences are growing.
The bottom line? The slowing recovery means that the case for a targeted, effective fiscal response is growing. That will require a degree of bipartisan compromise to get a deal done in a timely manner. Whether or not that’s possible in the highly divisive post-election environment remains to be seen.
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