Surprise! Americans Still Spending

Surprise! Americans are still spending. On their credit cards, maybe. But still spending nevertheless.

Retail sales in the US rose 1.3% in October, data out Wednesday showed, more than expected (figure below).

The range of estimates, from more than five-dozen highly-trained “scientists,” was 0.2% to 2%.

It was the largest gain since February. The figures aren’t adjusted for inflation. Sales rose 8.3% from October of 2021.

The key aggregates looked even stronger than the headline. At 1.3%, the ex-autos print nearly tripled consensus, and the control group’s 0.7% increase was more than double forecasts, a robust result made even more so by an upward revision to September’s figures.

The data came amid retailer earnings, including strong results from Walmart, which is benefiting from newly-poor rich people (more on that later).

A quick look at the retail sales breakdown showed nine of 13 categories increasing, versus eight in September and 12 last October. Unsurprisingly, the biggest gain came at gas stations, but sales were solidly (i.e., at least 1%) higher pretty everywhere they rose, including a 1.6% increase in outlays at food services and drinking places, the only services sector category in the report. Spending fell at general merchandise and department stores. Americans also spent less on electronics, appliances, sporting goods, musical instruments and physical books which, it turns out, still exist. Sales at nonstore retailers rose 1.2%.

The figures will be contextualized by the holiday shopping season, during which spendthrift Americans will enjoy deep discounts on various “stuff” thanks, ironically, to how much of that same stuff they bought during the pandemic. Retailers are struggling to clear excess inventory accumulated in 2021, when Americans bought so many goods that management teams over-ordered in an environment characterized by broken supply chains and lengthy waits for deliveries.

It’s possible that good news on the spending front is no longer overtly bad news for markets. Consecutive downside misses on key inflation measures (CPI last week and PPI on Tuesday) bolstered the “peak inflation” narrative, and as long as price pressures continue to abate, robust spending is a positive development to the extent it suggests the economy is still resilient in the face of aggressive Fed tightening.

Import prices, released concurrently with the retail sales figures, showed a smaller contraction than expected. The ex-petroleum print was -0.2%, against expectations for a much steeper moderation. Still, the ex-petroleum series has posted six consecutive monthly declines.

If you’re looking for a hyperbolic punchline vis-à-vis retail sales, I suppose the most obvious candidate goes something like this. The stronger the spending impulse, the more conducive to inflation (as companies have carte blanche to pass along higher input costs), and thereby the more inclined the Fed to hike rates. But if that spending impulse is being funded by revolving credit, then it’s all a circular doomsday machine, wherein shoppers bid up prices with their (variable rate) credit cards, thereby inadvertently bankrupting themselves via the Fed hikes that spending accidentally encourages.

Ba-dum-tss.