Retail Sales Surprise to Upside in October, but Outlook Gloomy

A customer shops in a Kroger grocery store in Houston, Texas, on July 15, 2022. Photo by Brandon Bell/Getty Images

Retail sales beat market forecasts in October as Americans bought more big-ticket items like cars and furniture, but the outlook for the all-important holiday shopping season looks gloomy, as retail giant Target warned of a consumer demand slump.

The Department of Commerce reported on Nov. 16 that retail sales rose 1.3 percent last month, beating market forecasts of 1.0 percent. In September, retail sales were flat, at 0.0 percent.

Highlights include purchases of automobiles and parts (+1.3 percent in October vs. -0.3 percent in September), furniture (+1.1 percent in October vs. -0.9 percent in September), and e-commerce (+1.2 percent in October vs. +0.6 percent in September).

So-called core retail sales, which exclude automobiles, gasoline, building materials, and food services, advanced 0.7 percent last month, compared to 0.6 percent in September.

Core retail sales correspond most closely with the consumer spending component of gross domestic product (GDP).

Following the forecast-beating retail sales report, Morgan Stanley revised its forecast for fourth-quarter GDP growth, from 0.7 percent to 1.7 percent.

But there are clouds on the horizon, as retail giant Target reported, on Nov. 16, that its third-quarter profit fell by around 50 percent and warned that sales were slowing going into the holidays.

Target, whose shares plunged 15 percent on the opening bell Wednesday, warned of “dramatic changes” in consumer behavior that was hurting demand as high inflation forced families to switch spending toward necessities.

Christina Hennington, Target’s chief growth officer, said on a call with reporters that during the last two weeks of October, customers’ price sensitivity had intensified.

Soft Landing?

The retail sales numbers sparked some cautious optimism that the economy could either avoid an anticipated recession next year or that the downturn might be mild.

“We might be in for a soft landing after all,” said Paul Ashworth, chief North America economist at Capital Economics in Toronto.

But some analysts pointed to weakness in the retail sales data, especially when looked at in annual terms and against the backdrop of soaring inflation.

Retail sales rose 8.3 percent year over year in October, a decline from September’s 8.6 percent year-over-year gain.

“Like other recent months, year-over-year retail sales increases continue to be roughly in line with inflation. That speaks to a trend of consumers spending more, but not necessarily getting more,” Ted Rossman, senior industry analyst at Bankrate, told The Epoch Times in an emailed statement.

While sales at electronics and appliance stores rose 0.4 percent month over month in September, they fell 12.1 percent year over year.

“This suggests that people are cutting back on these larger, often discretionary, purchases. That’s likely because high inflation is leading them to spend more on essentials, and also because a lot of demand was pulled forward the past couple of years due to the pandemic,” Rossman added.

Inflation in the United States has been running near multi-decade highs, with the Consumer Price Index (CPI) advancing 7.7 percent year over year in October.

Elevated price pressures have prompted the Federal Reserve to embark on its fastest pace of rate hikes in decades, driving up borrowing costs and fueling speculation that the U.S. economy would tip into a recession—if it isn’t in one already.

The economy posted two back-to-back quarters of negative GDP growth earlier this year, meeting the rule-of-thumb definition for a recession, although the official arbiters of business cycles at the National Bureau of Economic Research have yet to label it as such.

Preliminary government data released at the end of October showed that the U.S. economy expanded at an annualized pace of 2.6 percent in the third quarter.

Hard Landing?

While a number of Fed officials have said they still see a way for the U.S. economy to avoid a hard landing—meaning a recession—Esther George, president of the Federal Reserve Bank of Kansas City, told The Wall Street Journal in an interview Tuesday that a contraction is a very real possibility.

“I’m looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there,” she told the media outlet.

Since March, the Fed has raised rates to a range of 3.75–4.0 percent, the fastest pace of monetary tightening since the 1980s.

“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,” George said.

Investors expect the Fed to deliver another rate hike of 50 basis points in December.