Spending at US retailers continued to grow last month, a fresh sign that American shoppers aren’t tapping out just yet.
Retail sales, which are adjusted for seasonality but not inflation, grew 0.7% in September from the prior month. That’s slightly below August’s revised 0.8% gain and marks the sixth-straight month of growth. Factoring in September’s 0.4% rise in consumer prices, inflation-adjusted retail sales were up 0.3% last month.
From a year earlier, retail sales and food services spending were up 3.8% in September, the strongest annual gain since February.
Spending grew across most categories last month, with sales at specialty stores advancing the most, by 3%. Online sales and car purchases also grew at a strong clip, both rising 1.1% in September from August. The two weakest sales categories last month were clothing and electronics, declining 0.8% during the same period.
“With employment high, wages outpacing inflation, and recession talk quieter, consumer spending is growing and propelling the economy forward,” wrote BIll Adams, chief economist at Comerica Bank, in analyst note. “But growth will likely be slower in the fourth quarter, with headwinds from the restart of student loan payments, the UAW (United Auto Workers) and actors’ strikes, and tail risks from the Israel-Hamas war and a possible government shutdown.”
Compared to August, higher gas prices had a much smaller effect on retail spending in September. Excluding sales at gasoline stations, retail sales still advanced 0.7% last month. Adams said the US Energy Information Administration “reported a jump in gasoline inventories in the last several weeks, consistent with a seasonally adjusted drop in volumes sold.”
Still, a respite from higher energy prices remains at risk if an escalation of the conflict between Israel and Hamas destabilizes the oil-rich Middle East, further tightening oil supply. That would inflict more pain at the pump, pushing up inflation and eroding Americans’ spending power.
Softer spending
The US economy is widely expected to lose some momentum in the coming months, including a weaker job market and softer consumer spending, which accounts for about two-thirds of economic output.
The Fed’s 11 rate hikes, higher bond yields, tougher lending standards and the fatigue from high inflation are all expected to pull on the economy’s reins heading toward the final months of the year. There is also the uncertainty around ongoing labor strikes, which some Americans have already begun to raise concerns about in the University of Michigan’s bimonthly consumer survey. And the excess savings that US consumers accumulated during the pandemic might have already been depleted by now, according to research from the San Francisco Fed.
Altogether, the economic landscape is expected to become more challenging, but American consumers have proven to be resilient this year in the face of inflation and higher borrowing costs. The fate of spending largely hinges on the state of the labor market.
“Retail sales continue to surprise on the upside because of lingering competence in the labor market, even though savings are down and real incomes obviously continue to get squeezed by inflation,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told CNN.
Employers added a stunning 336,000 jobs in September, beating economists expectations yet again, while the unemployment rate held steady at a low 3.8%. A separate report released earlier this month showed that job openings unexpectedly rose in August to 9.6 million, though they were considerably lower than the record high of 12 million set in the spring of 2022.
Economists say that the economy’s performance during the holiday season will be key in understanding it’s trajectory in the early months of 2024.
Brian Field, global leader of retail consulting and analytics at Sensormatic Solutions, a retail data analytics company, said in a statement that he’s expecting foot traffic at US retailers during this year’s holiday season to “remain consistent” compared with last year’s traffic, barring extreme weather.
While bets of a recession this year have collapsed, an economic downturn sometime next year is another question.
Uncertainty on energy inflation
An intensification of the Israel-Hamas war in the Middle East could cause energy prices to rise, complicating the Federal Reserve’s mission of bringing inflation back down to its 2% goal. It would push up inflation overall, and if energy prices remain elevated for long enough, it could also feed into so-called “core” inflation, or a measure that strips out volatile food and energy prices. Services such as flights and freight could become more expensive since those include the use of fuel.
US consumers are highly sensitive to changes in gas prices, so if energy prices spike because of war in the Middle East, consumer sentiment could also take a hit. Eventually, Americans could curb their spending as higher gas prices take a bigger bite out of their budgets.
Evidence of Iran’s direct involvement in Hamas’ brutal attack on October 7 would strengthen US sanctions on Iran, weighing on oil output and exports, EY-Parthenon Chief Economist Gregory Daco told CNN in a recent statement. On top of OPEC+ production cuts, tighter oil supply because of war in the Middle East would inflict more pain at the pump.
“A surge in oil prices in the current economic environment would likely lead to more demand destruction than in 2022 when the economy was fiscally stimulated,” Daco said. “This, combined with the drag from financial conditions could put significant downward pressure on domestic spending and investment so that the Fed would not necessarily want to tighten monetary policy more.”
The Israel-Hamas war seems to still be raging on with reports of multiple airstrikes in the region on Tuesday.
President Joe Biden will visit Israel and Jordan Wednesday.
