U.S. Retail Sales Remain Strong! Is Recession Avoidable?


 US retail sales rose more than expected in September as households increased purchases of motor vehicles and at restaurants and bars, suggesting that the economy was better in the third quarter.

According to the Department of Commerce, retail sales increased by 0.7% last month. Data for August has been revised upwards to show a sales increase of 0.8% compared to 0.6% as previously reported.

Economists polled by Reuters had forecast retail sales to rise by 0.3%. Its main retail sales are goods and are not adjusted for inflation. The increase also benefited from higher gasoline prices, which increased reception at service stations.

Although the economy is showing resilience, pressure is mounting for consumers. Higher interest rates by the Fed to combat inflation have pushed credit card delinquency rates to the highest level in 11 years. Consumers increasingly rely on credit cards to finance purchases. Millions of Americans began repaying student loans in October, which the economy estimates is equivalent to about $70 billion, or about 0.3% of disposable personal income.

Nevertheless, consumer spending continued to be driven by a strong labor market, with the economy creating 336,000 jobs in September. Excess savings accumulated during the Covid-19 pandemic are still higher than previously estimated.

Excluding sales of vehicles, gasoline, building materials and food services, retail sales increased by 0.6% in September. Data for August has been revised to show an increase in underlying retail sales of 0.2% compared to 0.1% as previously reported.

These basic retail sales have the highest correlation with the consumer spending component of GDP. Consumer spending is expected to have increased in the third quarter, a string of jumps in July. Spending on services also remains strong, which should boost overall consumption.

Estimated GDP growth for the third quarter is currently at an annual rate of 5.1%.

The economy grew at a 2.1% pace in the April-June quarter, and continued to pick up despite the Fed raising its key overnight interest rate by 525 basis points from March 2022 to the current range of 5.25%-5.50%.