Retail Sales Report: Good News or Bad News?

The economy continues to hold up despite what some media outlets are telling us. US retail sales of goods and food services surged .7% in September, more than twice the expected gain. Previously reported sales during August were upwardly revised as well. Growth was broad-based across categories, with weakness confined to electronics, apparel and appliances. Separately, Deloitte’s annual holiday shopping survey predicts that consumers will return to pre-Covid levels of spending for the first time. In fact, it suggests consumers plan to spend 14% more this holiday season vs. last year.

And yet, we’re bombarded with headlines bemoaning the death of the consumer. Today Bloomberg ran this headline: “Restaurants Face Spending Slowdown as Economic Outlook Softens.” Nevermind that food service spending is up 9.2% from a year ago. Another article acknowledged retail sales strength, but said it was due to a “temporary burst in activity that’s unsustainable.” The most often cited signs of coming weakness are resumption of student loan payments, rising credit card balances and falling savings rates. These factors are real, but their degree of severity is overstated. For example, credit card delinquency rates are only just now back to pre-pandemic levels. And Deloitte’s survey identifies student loan payments as impacting only 17% of respondents.

Meanwhile, the unemployment rate is unusually low at 3.8% and there are 1.5 open job positions for every unemployed person. The massive wave of corporate layoffs never materialized. I think CNBC reporter Steve Liesman had it right when he said, “I’m struck by the incredible negativity that has accompanied the outlook for the consumer.” Despite continued economic resilience and a strong job market, “people think the consumer is going to give it up.” He believes economists have “routinely underestimated the value of a job.”

Investors, on the other hand, are actually more concerned that the economy may be too strong. After the retail sales report was released this morning, traders immediately sold both stocks and bonds out of fear that continued economic strength will force the Federal Reserve to raise interest rates again before the year is out. The Fed’s primary goal is to bring inflation down, and a resurgence in growth could end up reigniting inflation. At the very least, it seems likely that the Fed will keep rates elevated for a longer period of time to make sure that doesn’t happen.