Retail sales top forecasts as American consumers stay resilient

REAL ECONOMY BLOG | October 17, 2023

Authored by RSM US LLP

U.S. retail sales surged above expectations in September, ending a robust quarter with a bang and raising the possibility that gross domestic product for the third quarter will be higher than expected.

Fueled by a healthy level of excess savings–which is around $400 billion in our recent estimate—and a strong labor market, American consumers continued to defy forecasts of a material slowdown in spending.

Total sales rose by 0.7% on the month, following an upward revision to 0.8% for August, the Commerce Department reported on Tuesday. That was equivalent to a 6.9% increase on a three-month annualized pace, up significantly from 5.8% in August.

The retail control group—which excludes volatile components like vehicles, gasoline, food and building materials—also posted a strong gain, rising by 0.6% on the month, or by 6.4% on a three-month annualized basis.

The group is often a good proxy for consumption spending on goods inside GDP. That means Tuesday’s big upside surprise should add more upside risks to our third-quarter GDP call, which had been at 3.1% before the release, when the data is released on Oct. 26.

With the new data, our GDP tracking model shows that third-quarter growth is now up to a range between 3.3% to 4.7%, much more in line with the Atlanta Fed’s GDPNow.

Inflation and high gasoline prices did not play a major role driving the increase in September, making the surge in sales even more impressive. Commodity prices rose by only 0.1% according to the consumer price index report released last week. Except for food and drink services, the retail sales data covers only goods spending.

Spending on gasoline rose by only 0.9% on a non-inflation adjusted basis, much lower than August’s 6.7% increase because of the spike in gasoline prices.

Underneath the top-line figure, sales gains were broad-based, with eight out of 13 categories posting an increase in September. Spending at miscellaneous stores, online and for motor vehicles led the increase, rising by 3%, 1.1% and 1.0%, respectively.

Should we expect the same level of spending momentum to continue into the holiday season?

Probably not, given the economic headwinds taking place. It is important to keep in mind that sales could show some declines similar to last year during the holiday season because of early spending. The risk of a government shutdown remains with Congress facing another deadline next month.

The takeaway

We think that American consumers should remain on solid footing in the final quarter, staked by a healthy level of excess savings and strong wage growth that will offset some of the headwinds.

Tuesday’s data should not alter the Federal Reserve’s calculation to hold rates steady in November in our opinion. The economy is moving on the right track toward a soft landing where inflation should slow further while spending continues to hold up.