Shopping mall in New York City

Spending Surprise

US retail sales numbers for September offer further encouragement that the COVID-19-related slowdown in activity in July and early August has given way to a more positive macro environment now that case numbers are falling sharply.

Headline sales rose 0.7% month-on-month versus expectations of a 0.2% drop, and there were upward revisions worth 0.2 percentage points. We were certainly on the more pessimistic end of expectations given unit auto sales slowed from an annualized 13.06 million rate in August to 12.18 million in September due to the semi-conductor chip shortage that has blighted the industry.

Yet somehow the value of motor vehicle and parts sales rose 0.5%. Either prices are surging far faster than as measured by CPI, or there are some data problems.

US Retail Sales Levels versus January 2020

Macrobond, ING 

There were mixed performances elsewhere, with sporting goods surging 3.7% month-over-month and general merchandise gaining 2% and gasoline station sales rising 1.8%. However, electronics fell 0.9% and health and personal care dropped 1.4%.

Nonetheless, the control group, which excludes the volatile autos, food, and building materials components and is historically better correlated to broader consumer spending trends, rose 0.8% versus expectations of a 0.5% gain. As such, it does indeed look as though we are seeing the economy re-accelerate.

Rising Incomes and Wealth to Fuel Spending

Consumer finances remain in good shape with incomes picking up thanks to rising employment and wages. The really encouraging news is that this is offsetting the ending of unemployment benefits. Additionally, with firms desperate to hire workers and wages being bid higher, this looks set to continue.

Meanwhile, the Federal Reserve flow of funds data showed that households have seen their wealth surge $26 trillion since the end of 2019 with $3.5 trillion of that increase being in liquid cash, checking, and time savings deposits. With some of this likely to be spent in coming quarters, we wouldn’t bet against consumer spending being a really strong growth driver next year.

Spending on Services will Grow Even Faster

That said, we wouldn’t be surprised to see retail sales underperform broader spending over the next 12 months. Remember that retail sales is largely expenditure on physical things rather than services and as the chart below shows, services are now the dominant spending category. Even if we see some falls in retail sales, broader consumer spending can still rise substantially given a greater number of options on which to spend money.

Retail Sales as a Proportion of Total Consumer Spending (%)

Macrobond, ING

Recent high frequency numbers show that hotel, air travel, and restaurant dining has increased substantially through mid-September into October. Together with the recent retail sales number, this points to a firm consumer spending figure.

These figures also fit with our story that, after a Q3 soft patch, the economy appears to be re-accelerating as we head to year-end. This reinforces the message that there is no need for the Fed to delay on "normalizing" monetary policy with the QE taper decision set for Nov. 3.