Consumers Open their Wallets Wide

Retail sales rose 0.2% in November, in line with expectations. Sales, excluding the volatile vehicle category, were up a solid 0.5%, while the control measure of retail sales, which goes into overall GDP calculations, surged 0.9%. Moreover, those gains came on the heels of an upward revision to October’s control measure. Falling prices at the pump and a pick up in wages, most notably in low-wage sectors, are broadening spending gains this holiday season.

Online spending jumped 2.3% this month, and posted solid double-digit gains from a year ago, as more consumers made purchases on their smartphones. Spending at furniture and electronics and appliance stores also posted unusually strong increases during the month. Remodeling remains the one bright spot in the housing market as homeowners with equity are opting for repairs and upgrades rather than trading up to more expensive housing.

General merchandise stores also saw some gains, with traditional department stores competing more effectively against the big-box discounters than we have seen in recent years. I have to admit that the discounts in many department stores that I saw ahead of Black Friday were much more generous than in recent years. The question is whether that will persist. Sears is in the process of closing many of its stores, and more high-profile closings in the retail sector are expected next year.

Spending at clothing stores softened a bit, falling 0.2% in November from October. It is worth noting that all of that “weakness” was due to aggressive discounting. Apparel prices plummeted 0.9% in November after rising the previous two months. That means spending on clothing, which has lagged during much of the expansion, actually rose fairly dramatically after adjusting for inflation during the month.

The surprise in the November report was the lack of discretionary spending at bars and restaurants given the drop in prices at the pump. A combination of factors - higher prices at food and drinking places in November and recent stock market volatility - likely contributed to the weakness in dining and drinking out. High-income households are more responsive to the day-to-day movements in equity prices than the rest of the economy.

Conversely, lower income households were able to spend more at their local grocers, and even entertain. Prices at grocery stores fell in recent months as trade tensions took a toll on farm exports. That may reverse if we continue to make progress in talks with China, which has started to buy soybeans again. Much will depend on how much progress can be made in the narrow 90-day window opened for the resumption of negotiations.

Bottom Line
A drop in prices at the pump and a pick up in wages at the low end of the income strata are delivering more broad-based gains in consumer spending. Look for consumers to remain a driver of GDP gains in the fourth quarter, even as overall growth moderates a bit.

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