Recovery in Goods Continues

Retail sales rose 1.9% in September, more than twice the pace we saw in August. Spending on vehicles, clothing and sporting goods were drivers of overall gains. Traditional department stores also saw a sharp rebound in spending after contracting last month but remained 7.3% behind levels one year ago.

The weak spots in September were in electronics and furniture stores, grocery stores and big-box discounters. The weakness in spending at grocery stores has been partially offset by an increase in spending at restaurants and bars but dining out is still down at a double-digit pace relative to a year ago. The slowdown in spending at grocery stores and big-box discounters comes at a time that supplements to unemployment insurance (UI) have lapsed. Recent research on UI supplements and stimulus checks reveals that low-income households saved what they could before extra payments ended in July; those savings were depleted in August and September.

Spending online remained weaker than it was during the height of lockdowns on a month-to-month basis, but was up more than 23% from one year ago in September. The shift of Prime Day by Amazon is expected to juice online sales again for October but will borrow from the surge in spending we tend to see during the week of Thanksgiving.

The next strongest category on a year-over-year basis was spending at building material and garden stores. An increase in home sales and the shift to working from home have boosted spending on home repair and remodeling projects.

Core retail sales, which feed into consumer spending in the overall GDP figures, bounced back at a 1.4% pace after contracting more than initially reported in August. Consumers have shifted away from spending on services to goods in the wake of COVID. Look for the tradeoff between goods and services to accelerate as we get into the holiday season. Travel and tourism are expected to be particularly weak if the threat of contagion continues to rise. The number of COVID cases is surging again, which will further limit use of indoor venues. The restaurant industry is seeing permanent closures accelerate, while large chains that are able to pivot more to curbside and drive-through services are gaining market share.

The real test will be how well spending holds up as we move into the fall season when temperatures drop, cases are expected to surge, and the saving triggered by generous UI supplements is further depleted. Congress has delayed talks on additional aid; our contacts in Washington warn that unless aid is passed prior to the election, it is not likely until after whoever wins the presidential election is sworn in on January 20th.

Bottom Line
September was a month when people could kick up their heels a bit as COVID cases waned and the saving triggered by earlier stimulus was tapped. The lapse in supplements to UI and recent resurgence in cases both at home and abroad underscores the need for more federal aid. I gave up holding my breath over when that might happen. Congress appears to be willing to take the rebound over the summer and call it a day. The recovery remains K-shaped as the haves make big-ticket purchases and the have-nots strain to pay for basic necessities.

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