United States

Retail sales on solid path ahead of critical holiday shopping season

Conditions ripe for best retail sales in current business cycle

THE REAL ECONOMY  | 

The 1.6 percent increase in September retail sales data reflected the recent surge in replacement-driven vehicle purchases and rising gasoline prices. While the topline increase overstates the underlying trend in overall sales, the data beneath the headline number still implies growing momentum in the consumer sector ahead of the critical holiday shopping season.

U.S. household financial conditions have improved markedly since the Great Recession. Given the decline in the unemployment rate to 4.2 percent, and wage growth of 3.6 percent at a three-month average annualized pace, the condition of the American consumer is better than at any time over the past decade. We think that conditions are ripe for the best holiday purchasing season in the current business cycle.

To eliminate the month-to-month noise in the data, we prefer to look at the underlying three-month average annualized pace to get a better sense of the true trend. What we see is encouraging. Retail sales are up 3.8 percent on a three-month average annualized pace, and sales excluding autos and gasoline are up 3.6 percent. Excluding autos, sales increased 4.1 percent, ex-food services sales were up 3.9 percent, and the control group, which the U.S. Bureau of Economic Analysis (BEA) uses to calculate overall household consumption inside the quarterly gross domestic product (GDP) report, improved 2.6 percent.

Our forecast for the holiday season is for retail sales to increase 4.2 percent this year.

Amid strong retail demand, expect continued firming inflation

Topline inflation continues to suggest an overall firming in consumer prices. The September monthly consumer price index (CPI) figure increased 0.5 percent and is up 2.2 percent on a year-ago basis. At a three-month average annualized pace the consumer price index is up 2 percent, and is likely to increase in coming months as demand for commodities to support rebuilding and reconstruction in Texas, Florida and the U.S. Caribbean begins to be felt. Even so, there is nothing in the inflation data likely to cause the Federal Reserve to alter the current path of monetary policy. We expect the Fed to raise rates by 25 basis points in December, and follow through on its plans to pare down the balance sheet by $10 billion per month this year.

Middle Market Insight: The third quarter RSM US Middle Market Leadership Council Survey shows that 49 percent of middle market executives anticipate being forced to raise compensation in the next six months, a sign that wage inflation may be awakening as other price increases are beginning to appear. The same survey showed 56 percent are anticipating price increases for goods and services (excluding labor). Click here to see the full survey.

The major catalysts for rising prices in the September inflation data were the 2.8 percent increase in transportation costs, 1.1 percent increase in commodities and 1.8 percent increase in commodities excluding food and beverages. Among our closely watched metrics, the CPI rent of shelter is up 3.3 percent on a year-ago basis, the CPI ex-food and energy up 1.7 percent, and CPI services ex-rent and energy up 2.16 percent. Given the likely draw on commodities and services associated with construction during the next year, forward-looking businesses and households should anticipate an increase in core inflation, which excludes volatile food and energy components.

Strong households likely to boost holiday retail sales

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