Retail sales rose 0.2% m/m in October, ahead of expectations for a flat reading. The rise follows an upwardly-revised growth of 1.9% m/m in September (previously 1.6%), which was boosted by a rebound in purchases following Hurricanes Harvey and Irma.
Most categories rose in October, with the only major declines experienced by building material stores (-1.2%), gasoline stations (-1.2%), and non-store retailers (-0.3%). Having said that, the decline in sales at gasoline stations was partly a price story, with the price of gasoline pulling-back as the impact of refinery shutdowns waned.
The ‘control group’ used in calculating GDP (excluding gas, autos, building materials, and food services) was up 0.3% on the month – on par with consensus. Still, it follows an upwardly revised gain of 0.5% in September suggesting more consumption spending during the third quarter.
Key Implications
With upward revisions in September and better-than-expected retail sales growth in October, consumer spending appears likely to increase by around 3% (annualized) in the third quarter. While some of the recent momentum reflects the normalization of activity following the hurricanes, looking through the volatility consumers are likely to continue to a vital support to economic growth through the next year.
Alongside an acceleration in inflation, this report cements the case for the Federal Reserve to raise interest rates in December. Further out, the outlook for rate hikes over the course of 2018 will depend in large part on the stance of fiscal policy. A major tax cut at this stage in the cycle, while giving support to disposable income growth, is likely to be met with additional interest rate hikes by the Federal Reserve. Over the medium term, this will help return the economy to its trend rate of growth around 2.0%.
