Government data for October’s retail sales and producer inflation has raised the probability of a soft landing by a significant margin.
October’s retail sales indicated underlying strengths rather than weaknesses.
While sales slowed, the data came in higher than expected. When considered with an upward revision to September’s reading, October’s retail sales indicated underlying strengths rather than weaknesses. Producer prices showed a significant drop of 0.5% in October, much lower than forecasts.
The control group for retail sales, which serves as a more consistent proxy for underlying consumer spending appetites, grew at a steady pace to start the final quarter of the year. This is certainly good news, especially considering the headwinds on the horizon.
It has been evident for several months now that American households’ balance sheets remain exceptionally strong, providing ample support for further spending growth.
With estimated excess savings of at least $400 billion, it’s difficult to bet against American consumers in the next couple of months.
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Ultimately, consumers will curtail their spending only when they must. As long as income growth remains solid and job security is maintained, we should anticipate a period of sustained economic expansion, not a recession.
The downside surprise from producer inflation adds to the argument that the Federal Reserve should be done hiking rates this cycle.
We think that the rate cut conversation will begin to surface more often than not in the next couple of Fed meetings. While the central bank won’t likely talk about cuts publicly and prematurely, we should expect more hints on the rebalance of its policy stance toward a more dovish one starting this December.
Inside the data
Sales of all items dropped by 0.1% in October from an upwardly revised 0.9% in September, driven mostly by auto sales, which fell by a sharp 1%. Auto sales account for 19% of total sales and are the largest category.
Excluding autos, gas, food and building materials—which are often volatile—the control group grew by 0.2% on the month or 5.3% on a three-month moving average annualized pace. That is an encouraging sign for the final quarter, which will be subjected to a number of headwinds.
Electronics, along with health and personal care, led the increase in October, rising by 0.6% and 1.1%, respectively. Online and restaurant sales stayed solid, increasing by 0.2% and 0.3%, respectively.
In a separate report, producer prices showed a significant drop of 0.5% in October, much lower than earlier forecasts. Energy and food prices drove the decline, down by 0.2% and 6.5%, respectively.
Trade services, a proxy for retail and wholesales margins, fell by 0.7%, after dropping by 0.1% in the prior month. That was in line with earnings reports that suggested margin compression has been one of the top concerns recently.
The takeaway
October’s retail sales data continued to show how resilient American consumers have been against earlier forecasts of a spending hangover going into the last quarter.
With more signs that inflation is coming under control, the Fed can now begin to reassess its policy to pivot toward a sustained period of economic expansion, instead of staying behind the curve and risking a downturn.
