US Retail Sales Weaken, Fueling Economic Slowdown and Rate Cut Bets
A mere 0.2% rise in September spending fell short of forecasts, signaling that high interest rates may be starting to curb consumer demand.
A key gauge of U.S. consumer activity showed a marked slowdown in September, as retail sales grew by a smaller-than-expected margin, intensifying concerns that the Federal Reserve's prolonged campaign of high interest rates is beginning to weigh on the American consumer.
Retail and food services sales rose just 0.2% in September, a significant deceleration from the upwardly revised 0.6% gain seen in August, the Commerce Department reported on Tuesday. The figure fell short of the 0.4% increase that many economists surveyed by Bloomberg had anticipated, providing fresh evidence that the engine of the U.S. economy may be losing steam.
The market reaction was immediate, with Treasury yields ticking lower as traders increased bets that the Federal Reserve will move to cut interest rates sooner rather than later. The report challenges the narrative of a resilient consumer that has propped up economic growth despite persistent inflation and elevated borrowing costs.
A closer look at the data reveals underlying weakness. So-called core retail sales—which exclude volatile components like automobiles, gasoline, building materials, and food services—declined by 0.1% for the month. This metric is closely watched as it feeds directly into calculations for Gross Domestic Product (GDP), and its negative reading suggests a potential drag on third-quarter growth.
"While the headline number is still positive, the details paint a picture of a consumer who is becoming more selective," said one economist. "The decline in the control group is a clear signal that discretionary spending is under pressure."
The softness was widespread across several categories. Sales at sporting goods, hobby, and bookstores fell by 2.5%, while clothing retailers saw a 0.7% decline. In a sign that even the digital marketplace is not immune, non-store retailers, a proxy for e-commerce, also saw sales drop by 0.7%, according to detailed figures.
The report lands at a critical moment for the Federal Reserve. Officials have been looking for signs that the economy is cooling enough to bring inflation back to their 2% target without triggering a sharp downturn. This lackluster retail data could give policymakers more confidence that their restrictive stance is working, reinforcing the case for holding rates steady and potentially moving up the timeline for future cuts. Following the release, market pricing increasingly reflected expectations for a rate reduction as early as December.
Still, not all signs point to an imminent collapse in spending. Sales at gasoline stations rose 2.0%, largely reflecting higher prices at the pump, and miscellaneous store retailers posted a strong 2.9% gain. The data suggests that while households are pulling back on non-essential goods, spending on necessities remains firm.
Looking ahead, the crucial holiday shopping season will serve as the next major test for consumer durability. With household savings dwindling and credit card debt on the rise, the willingness of Americans to spend will be a decisive factor in determining the economy's trajectory heading into the new year.