US Retail Sales Stall, But Strong Core Data Reveals Consumer Resilience
Headline sales were unexpectedly flat in October, but a key underlying metric watched by economists showed surprising strength, complicating the outlook for the Fed.
U.S. retail sales were unexpectedly flat in October, a potential signal that higher interest rates and persistent inflation are beginning to weigh on American consumers. However, a closer look at the data reveals a more complex picture of underlying strength that complicates the economic outlook.
The Commerce Department reported Tuesday that headline retail and food services sales were unchanged from the previous month, missing economists' forecasts for a modest 0.1% increase. This follows a downwardly revised 0.1% gain in September, adding to concerns about the momentum of consumer spending, the primary engine of the U.S. economy.
The muted top-line figure was dragged down by a notable 1.6% decline in sales at auto dealers, a sector particularly sensitive to high borrowing costs. The reading initially sparked concerns that the consumer resilience that powered the economy through the summer was finally cracking under the pressure of the Federal Reserve's aggressive rate-hiking cycle.
However, a deeper dive into the report tells a different story. The so-called "retail control group"—a metric that excludes volatile components like autos, gasoline, and building materials and is used to calculate Gross Domestic Product (GDP)—surged by a robust 0.8%. This figure significantly beat consensus forecasts and suggests that core consumer demand remains solid.
"While the headline number looks disappointing, the engine of the consumer is still running," one economist noted. The strength in the control group was partially attributed to an early start to the holiday shopping season, with online retailers launching promotional events that pulled spending forward into October.
This divergence highlights a potentially growing gap in the American economy. While many households are feeling the pinch from the rising cost of living and pulling back on big-ticket items, spending on other goods and services remains healthy. This dynamic suggests a "K-shaped" trend, where the spending patterns of higher- and lower-income households are diverging.
The mixed report presents a complex challenge for the Federal Reserve. The headline weakness supports the case for pausing further interest rate hikes, giving officials more evidence that their policies are working to cool demand and curb inflation. Yet, the robust core spending figure indicates the economy may not be cooling as quickly as the central bank would like, diminishing the immediate prospect of rate cuts.
Following the report, traders in the federal funds futures market largely held to the view that the Fed is done with its tightening campaign. The data reinforces expectations for a prolonged hold, with the central bank likely to wait for more definitive signs of a slowdown before contemplating any policy pivot.
As retailers head into the crucial holiday season, this report suggests a competitive environment where value and promotions will be key to attracting budget-conscious consumers. While spending has not fallen off a cliff, the era of freewheeling, post-pandemic splurging appears to be over, replaced by a more cautious and discerning consumer.