September Retail Sales

Joel L. Naroff
President and Chief Economist

INDICATOR: September Retail Sales
KEY DATA: Sales: +1.1%; Excluding Vehicles: +0.6%

IN A NUTSHELL: “Recession, how can you say we are in recession when consumers keep spending?”

WHAT IT MEANS: We all know that consumers have stopped buying, right? Wrong. At least if you believe the Census Bureau. Retail sales soared in September helped along by a rebound in vehicle demand. But it wasn’t just vehicles as only supermarkets, garden supplies and sporting goods stores posted declines. There were large increases in sales of gasoline, despite a drop in prices, clothing, furniture, general merchandise and at restaurants. It was interesting that people ate out a lot more since this is a sector that tends to mirror optimism. Maybe people are not as distressed as the surveys seem to indicate. During the third quarter, retail sales rose at a robust 4.5% annualized pace and even adjusting for inflation, it looks like consumer demand was up solidly.

MARKETS AND FED POLICY IMPLICATIONS: This was a strong report in a line of releases that seem to refute the notion that a double dip is here or inevitable. The economy is not in great shape but it is hardly falling apart, a theme I have been harping on for quite some time. Unfortunately, we are in a slow, steady, grinding recovery that is not creating lots of jobs and that intense focus on employment is hiding the process. Yes, it would be nice to flip a switch and have economic and job growth start to soar but with housing, finance and fiscal policy acting as restraints, that is not realistic. In the face of those uncertainties, though, consumers are persevering and third quarter consumption should be strong enough that growth in excess of 3% is likely. Indeed, a solid increase in services spending, which is not part of the retail sales report, could send the number closer to 4%. Though not sustainable, that level of growth would put pressure on businesses to start hiring again. We had started switching gears early this year but the high price of gasoline cut the legs from under the recovery. Gasoline prices are down and should come down a lot more. That will add to spendable income and keep the upturn going. Investors are likely to eat up this report since it is a lot higher than expected. For a little while at least, the focus will be back on the U.S. economy rather than European sovereign debt.
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