Consumers showed surprising strength in September, boosting retail sales well above expectations despite high interest rates and worries over a weakening economy.
Retail sales rose 0.7% on the month, well above the 0.3% Dow Jones estimate, according to the advance report the Commerce Department released Tuesday. Gas station sales helped propel the headline number, rising 0.9% as prices at the pump accelerated.
Excluding autos, sales were up 0.6%, also well ahead of the forecast for just 0.2%. The so-called control group, which strips out items such as auto dealers, gas stations, office supply stores, mobile homes and tobacco stores and is used for the department’s GDP calculation, rose 0.6% as well.
The numbers are not adjusted for inflation, so they indicate that consumers more than kept up with price increases. The consumer price index, released last week, showed headline inflation up 0.4% in September.
On a year-over-basis, sales rose 3.8%, compared to the 3.7% increase for CPI.
Treasury yields moved higher following the report while stock market futures added to losses.
“The U.S. consumer cannot stop spending,” said David Russell, global head of market strategy at TradeStation. “All three retail sales reports for Q3 were above estimates, which puts us on track for a strong GDP number later this month. It also gives the Fed zero reason to loosen policy, which keeps the 10-year Treasury yield pushing toward 5%.”
Sales gains were broad-based on the month, with the biggest increase coming at miscellaneous store retailers, which saw an increase of 3%. Online sales rose 1.1% while motor vehicle parts and dealers saw a 1% increase and food services and drinking places grew by 0.9%, good for a yearly increase of 9.2%, which led all categories.
There were only a few categories that showed a decline; electronics and appliances stores as well as clothing retailers both saw decreases of 0.8% on the month.
The retail report is considered an important factor for the Federal Reserve as officials contemplate the future of monetary policy. While markets largely expect the Fed is done raising rates for this cycle, an unexpectedly strong consumer complicates the equation.
In other economic news Tuesday, the Fed reported that industrial production increased 0.3% in September, above the 0.1% estimate. Capacity utilization, or the level of potential output, edged up to 79.7%, 0.1 percentage point above the estimate. Also, the Commerce Department reported that total inventories increased 0.4% in August, one-tenth of a point above the estimate.
Fed Chair Jerome Powell speaks Thursday in New York, an event that markets will be watching closely for some indication about where he thinks rates are headed. The rate-setting Federal Open Market Committee next meets Oct. 31-Nov. 1.
Market pricing assumes a near-certainty that the FOMC will not hike then, but it could choose to do so at future meetings if economic data remains strong. The implied probability for a December hike moved up to about 43% following the release, compared to 34% on Monday, according to the CME Group‘s gauge of futures market pricing.
Consumers face headwinds going into the end of the year.
Employment growth is expected to slow though it, too, has defied expectations. Credit card balances are rising, with Bank of America reporting a 0.2% monthly gain in September balances. The resumption of student loan payments also is expected to impact spending.
Still, third-quarter economic growth is likely to be strong, with the Atlanta Fed’s GDP tracker showing a potential annualized gain of 5.1%.