October Retail Sales Point to Resilient Consumer

Consumer spending rebounded sharply in October. Retail sales rose by 1.3% after a stagnant September, beating market expectations for a 1% increase.  While the headline increase brings a dose of early holiday cheer, our enthusiasm is tempered by the knowledge that sales were likely pulled forward by earlier holiday promotions and perhaps a temporary boost from Hurricane Ian.  

In October, the largest jump came from gasoline station sales, which rose by 4.1%.  From the CPI report we know that gasoline prices rose by 4% in October.  Therefore, gasoline station sales, on an inflation-adjusted basis, were essentially flat.  Spending at food and beverage stores rose by 1.4% in October, lifted by the impact of the higher prices consumers are paying. Auto dealer sales rose by 1.5% in October after slipping by 0.5% in September, which we could chalk up to pent-up demand as the inventory situation slowly improves and replacement vehicle demand in the aftermath of Hurricane Ian.  

Sales at furniture and home furnishing stores and building materials stores rose by 1.1% each in October.  In September, both categories declined by 0.9% and 0.2%, respectively.  Hurricane Ian may have lifted building materials store sales last month, which is a similar occurrence to what occurred for this segment with Hurricane Harvey in August 2017.  In September 2017, building material store sales rose 3.3%.

When we look at spending for other discretionary categories such as apparel, sporting goods and electronics stores, wallets were closed in October.  Clothing store sales were unchanged while sales at sporting goods stores and electronics stores both fell by 0.3%.  Online sales performed well in October, rising by 1.2% although as noted, sales may have been pulled forward due to early holiday promotions.  

General merchandise and department store sales posted declines in October, falling by 0.2% and 2.1%, respectively.  In a recent earnings call, a big-box retailer noted that U.S. consumers are pulling back and sales are softening meaningfully. We believe this will be a recurring theme as we move further into the holiday season.

Sales at restaurants and bars increased by 1.6% in October after rising by 0.9% in September.  As noted in our latest Economic Compass, consumers are expected to travel and spend more time with, rather than funds on, their loved ones this holiday season.

Bottom Line:

The October retail sales data paints a picture of a resilient consumer.  Sales excluding autos, gasoline, building materials and food services – the so-called control group sales which factor into GDP calculations – rose by a firm 0.7% in October.  As a result, our current tracking estimate for Q4 2022 GDP growth is +0.4% on a seasonally adjusted annual basis.  More importantly, a resilient consumer will make the Federal Reserve’s job more difficult.  In an interview with The Wall Street Journal that was posted before the release of the retail sales data, Kansas City Fed President Esther George said reducing inflation without a recession might not be feasible.  “I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes,” said George.  Given KPMG Economics’ outlook for additional interest rate hikes in December and in early 2023, we expect consumer demand to deteriorate in the coming months.