Higher Prices = Higher Sales Totals

Retail sales surprised to the upside, coming in at a 0.7% rate in September as August and July sales were revised slightly higher. All categories except for electronics, appliances and health stores saw sales growth. That marked the first month when vehicle sales actually rose since April, but vehicle sales actually fell after adjusting for inflation; spending on food in grocery stores and at restaurants did, too. Retail sales, which mostly captured the surge in spending on goods we have seen in response to the pandemic, reached 20% above pre-pandemic levels in September.

Automobile shortages are expected to persist well into next year with chip manufacturers still unable to meet demand. Auto sales slipped to an annualized rate of 12.6 million in September; sales peaked in April on the back of stimulus checks. Toyota alone announced another 15% cut to global production in response to chip shortages. The historic spike in vehicle prices and lack of additional stimulus checks is souring consumer attitudes on buying vehicles, which means some of the sales we have lost to shortages will not come back.

Warehouse clubs and superstores saw 4.2% growth in the month even as online activity nearly flatlined at 0.6%. Consumers returned to in-person with back-to-school shopping in September after the Delta variant caused them to pull back in August. Delays to shipping items bought online are motivating a return to in-person shopping. Clothing sales increased 1% while sporting goods and hobby store sales jumped 3.7%.

Big-box retailers have an advantage with their ability to stock up earlier for the holiday season in order to meet demand at the end of the year. Smaller retailers are at a disadvantage negotiating with their suppliers and could face shortages. Add to that, the pressure that higher wages are putting on margins; some smaller firms may not be able to keep up.

Core retail sales, which feed directly into GDP calculations for the quarter, rose 0.8% in September, marking the slowest growth in one quarter since a drop in activity during Q4 2020. Building materials sales flattened while electronics and appliances purchases fell for the third month in a row. Supply chain disruptions and chip shortages are hitting these sectors hard as the surge in home improvements and sales mean that items for the home are in short supply.

Sales at food and beverage stores added 0.7% initially but lost ground after being adjusted for a surge in food prices. The inflation-adjusted drop in spending at restaurants was even larger.

Although enhanced unemployment insurance ended at the start of September, many households were able to tap into increased savings and child tax credits to support their families; many workers remain on the sidelines. Concerns over child care, the ability to get to work and the need for upskilling are the main reasons cited for not returning to the labor force. The enhanced child tax credits end in December; there is no other federal stimulus planned for households.

Bottom Line
We are emerging from the Delta-induced lull in the third quarter but now are facing much higher inflation and goods shortages, which will constrain spending for the fourth quarter. Supply chain disruptions will not be resolved quickly as retailers scramble to stock up for Christmas. The Federal Reserve has no choice but to taper its purchases of Treasuries and mortgage-backed securities starting in November.

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