Retail sales edged lower in October in advance of the critical holiday shopping season

Shoppers took a break in October, and retailers felt the pinch of those wallets closing. Perhaps it was a pause that refreshes, following a three-month string of solid gains. Perhaps it was an opportunity for consumers to regroup in advance of the holiday shopping season. Whatever the reason, retail sales edged lower by 0.1% last month — the first monthly decline for retailers since March but still a fractionally better result than economists had anticipated.

Volatile gasoline prices can skew single-month results, as can the ebb and flow of high-ticket items, most notably automobiles. Both were moderate headwinds last month, shaving 0.2% off headline sales growth. In the case of gas station sales, that’s not bad news for consumers. The average price of a gallon of gas dropped over 20 cents nationally in October, providing a little more leeway for discretionary spending in household budgets.

Conversely, higher interest rates are undoubtedly causing consumers to think twice about pulling the trigger on buying a car. Recent monthly sales volume remains well ahead of the comparable period a year ago though, as activity rebounds from the exceptionally weak volume of the prior few years.

Weaker results extended across multiple retail sectors last month, although the picture was a mixed bag. Consumers spent more freely on health and personal care goods, electronics, and appliances. Restaurants, bars, and grocery stores all saw an uptick in sales.

The rotation of spending from goods to services may not be as pronounced as it once was but still appears to be playing a role in how households are prioritizing spending. That remains very apparent in the one-year growth of restaurants and bars (+8.6% YoY) compared with declining sales for furniture and home furnishings (-11.8 YoY) and building materials (-5.6%). The peak period of social distancing and working from home drove a buying binge on upgrades, remodels, and refurbishment, but that’s now squarely in the rearview mirror.

Whether or not one month of weak gains represents an anomaly or the early stage of an extended slowdown remains to be seen. Retailers have benefited from rising prices in recent years, which boosted top-line sales growth while consumers were flush with cash and eager to spend. Inflation is now in retreat, which will increase the importance of unit volume growth going forward. At the same time, lower inflation should put consumers in a better mood and provide a bit more leeway for discretionary spending, particularly if the Fed is successful in guiding the economy to a soft landing.

Beyond inflation, the Fed’s attempts to cool labor market conditions will also be important to the outlook for consumer spending. A gradual uptick in the unemployment rate without the shock of significant job losses could pave the way for a slowdown — not a retrenchment — in consumption. Recent data on both consumer and producer prices confirm that the disinflationary cycle remains intact, while jobs data points to slower job growth without a spike in layoffs.

Looking ahead, there are indications that retailers are guarded in their expectations for the holiday shopping season. Retailers have curtailed their holiday hiring plans compared to recent years in anticipation of slower sales growth this year and perhaps a more value-conscious consumer.

The economy isn’t out of the woods, and recession risk is still elevated, but there’s a visible, potential path to a soft landing as well.

The bottom line: One month of flat retail sales isn’t a red flag, particularly coming off three consecutive months of strong gains. Sales are expected to grow in the coming months, but the holiday spending spree is expected to be more measured than in recent years.

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