Consumers Spend Despite Prices

Retail sales in October jumped 1.7% from the previous month, higher than expectations, as consumers continue to face rising prices. That is the highest monthly increase since March of this year; October is traditionally the second busiest shopping month of the year. Supply chain constraints and longer shipping times have pulled the holiday gift-buying season earlier, while higher prices mean higher spending on everything from toys to clothing to cars.

Spending on motor vehicles and parts grew for the second month in a row as car sales came in at 13.4 million in October, up from September’s lackluster sales. Producers are finally up and running again and working through backlogs. However, supply chain bottlenecks persist.

Gas prices jumped in October with spending at gasoline stations up 3.9%. Spending more on fuel is eating away at wage gains, especially at the lower end of the wage scale. Although job growth has been strong in the past quarter, many of those looking for work that requires a commute are held back by high fuel prices.

Consumers continue to spend more on goods than services, a shift that began with the pandemic. Halloween, the second-largest consumer holiday of the year, provided a boost to spending; even big-box stores reported gains.

Spending at restaurants and bars was flat for the month. The hospitality industry has been hit especially hard by labor shortages, with many restaurants forced to cut their opening hours and run shifts with skeleton crews. Some even report having to cancel or move reservations.

Spending online returned after contracting last month. Consumers grew impatient with long delivery times and out-of-stock items and returned to in-person shopping. That trend reversed in October with more buying Christmas presents early. Spending jumped 4% in the month.

Core retail sales, which are used for GDP calculations for the fourth quarter, rose 1.6% in October. Spending at electronics, appliances, sporting goods and building materials stores came in strong for the month. Imports are up 20.5% compared to a year ago; we expect them to remain strong into the end of the year. The reopening of the border to vaccinated foreign travelers in November will add to strong sales for the end of the year.

Bottom Line
Strong retail sales in October offer a glimpse into fourth-quarter GDP, as growth could come in at the strongest pace since Q3 2020. The concern is that rising inflation and souring sentiment could hamper consumer activity later in the year. We expect supply chain concerns to remain elevated into 2022. The Federal Reserve could move up its first rate hike to the first half of next year.

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