Retail sales rose sharply in September
The consumer, the consumer, the consumer — still the primary engine of growth for the U.S. economy, and one that doesn’t appear ready yet to surrender to the headwinds of higher tighter financial conditions and growing uncertainty on multiple fronts.
Their confidence in the economic outlook may be restrained, but their recent spending habits wouldn’t betray that skepticism. The seeming disconnect between dimming consumer sentiment and robust spending may leave some scratching their heads. For now, the message is clear: watch what they do, not what they say.
Retail sales rose sharply in September, advancing by 0.7%, while easily topping forecasts for a more pedestrian 0.3% increase. Core retail sales, which excludes automobile and gasoline sales, advanced at a solid 0.6% clip. Further reinforcing the strength of the consumer sector was an upward revision to August retail sales from 0.6 to 0.8%, mitigating the potential that the unexpectedly strong September advance was simply a one-month anomaly.
The question remains: how much further can consumer spending momentum carry the economy before the collective force of converging risks push back?
A trifecta of strong wage growth, an abundant stockpile of cash, and ample credit availability has fueled robust spending growth over the past few years, providing sufficient catalysts for households to spend more despite surging prices.
While the degree of benefit from these catalysts has ebbed, they don’t yet appear to be exhausted. Whether they will be sufficient to carry consumer spending forward in the face of higher energy costs, the resumption of student loan payments, and the continuing absorption of higher interest rates throughout the economy remains to be seen.
Coupled with recent unexpectedly strong data on the labor economy, indications of robust consumer spending will also raise questions about the Fed’s comfort level with its current policy rate. Fed policymakers hinted strongly at the probability of at least one more rate hike coming out of the last FOMC meeting just a month ago. That bias was reinforced by updated quarterly projections that indicated a probability of another quarter-point rate hike before the end of the year.
The subsequent surge in long-term interest rates and indications of further tightening in financial conditions has increasingly called the need for another hike into question. Multiple Fed governors appeared to be walking back the probability of another rate increase in recent weeks, or at least opening the door to the possibility that perhaps they could stand pat and let other market forces do some of the work for them.
The strength of the retail sales numbers as an indication of consumer resiliency will further muddy the water for the Fed. Long-term treasury yields already popped higher this morning in response, while equity futures edged lower. Both would suggest a recognition that surprisingly persistent economic momentum increases the potential that short-term rates have a bit more upside left.
It’s still a strong consumer economy, despite the one-two punch of inflation and higher interest rates in recent years. Consumers may have less fuel to sustain spending than a year ago, but they don’t appear to be exhausted yet.
The bottom line? Strong retail sales are good news for the near-term growth outlook but raise the stakes for the Fed. It also increases the probability that policymakers will feel compelled to do more, extending their aggressive tightening campaign to cool the economy and get the inflation genie back in the bottle.
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