By: Jose Torres Interactive Brokers’ Senior Economist

The Federal Reserve’s aggressive war against inflation has yet to defeat strong consumer spending, with the U.S. Census Bureau estimating that October retail and food service sales climbed 1.3% month over month (m/m), exceeding market expectations of a 1% increase. On a year-over-year basis (y/y), retail sales climbed 8.3%, which is also impressive. Both measures are higher than their inflationary counterparts, meaning that consumption expanded last month on a real basis. Gains were broad based across categories as consumers continued to reach for their wallets and pocketbooks.

The news, along with gloomy guidance from Target and Micron, is causing investor sentiment to weaken. While the overall Consumer Price Index (CPI) released on November 10 showed moderating inflation, consumer sentiment, personal savings and credit card debt show moderating demand and weakening spending capacity. The tug of war between optimism about inflation and concerns about consumers is causing the latest bear market rally to peter out right beneath the S&P 500’s 200-day moving average, a pivotal technical resistance level. 

On one hand, the strong consumer spending report is supportive of fourth-quarter gross domestic product (GDP), but on the other hand, it implies that the Federal Reserve (the Fed) may be less likely to engineer a dovish tilt in the near future. 

October gains occurred across categories. The strongest traffic was experienced at gasoline stations, dining establishments, food and beverage stores, motor vehicles and parts dealers, e-commerce and home furnishings with gains of 4.1%, 1.6%, 1.4%, 1.3%, 1.2% and 1.1%.  Building materials, health and personal care stores and miscellaneous retail stores also contributed to a strong headline number. During the month, motor vehicle sales benefited from two factors. First, a lack of product availability has created pent-up demand for cars. Secondly, more cars became available due to supply chain improvements.  Consumers also continued to splurge on entertainment, such as dining out, with the COVID-19 pandemic having created strong pent-up demand for those services because of economic lockdowns. 

Retail Sales Oct-2021 – Oct-2022

While the overall consumer spending increase was impressive, the strength of consumers isn’t yet crystal clear as illustrated by the following examples:

• Amazon.com’s prime sales days in mid-October are estimated to have produced $8 billion in gross merchandise sales, according to Bank of America. That fell roughly $2.7 billion short of Amazon.com’s prime sales event in July. 
• Target today reported that its third-quarter revenues increased 3.4%, but earnings fell short of expectations due to higher markdowns and a more cautious customer, especially in the final weeks of the reporting period. The company also warned of a weak holiday season as families trade off discretionary purchases with necessities to manage inflation. 
• Micron Technology is cutting its chip production by about 20% in response to weakening demand while also considering additional cuts in the near future as the company’s 2023 outlook weakens.   
• Walmart, furthermore, reported that its third-quarter U.S. sales grew at an annualized rate of 8.2%, in part because wealthier customers struggling with inflation are switching to the company, which is known for its low prices. During trying economic times, Walmart tends to gain market share as consumers seek ways to curtail spending.   

While investors may be discouraged by retail sales contributing to inflation, mixed messages from data providers and corporates continue to generate confusion concerning how strong the consumer is. At the same time, however, the report illustrates that the Fed will likely need to continue with its aggressive monetary tightening to curtail inflation. 

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