Belies Tales of Consumer Woe

• Retail sales increased 1.7% in October, well above the consensus estimate. Details were good, with sales up in most segments.
• Sales growth was also revised higher in September.
• Higher prices drove some, but not all, of the increase.
• Holiday sales will be up around 15% compared to their level in 2020. Most of the increase will come from higher volumes and not higher prices.

Retail sales increased 1.7% in October from September, according to the Census Bureau. This was much better than the 0.5% consensus expectation. Sales growth in September was revised slightly higher, to a 0.8% increase, from the initially reported 0.7% gain. Sales excluding motor vehicles and parts were also up 1.7% in October, with sales excluding gasoline up 1.5%. Sales excluding autos and gas were up 1.4%. Control sales—sales excluding autos, gasoline, food service, and building materials, and which go into consumer spending in GDP—rose 1.6% over the month.

Sales were solid across segments. Sales of autos and parts rose 1.8% in October, the second straight month of sales growth better than 1% after parts shortages weighed on auto production and sales over the summer. Sales at gas stations increased almost 4%, although that was due mainly to higher prices. Sales at electronics and appliances stores also increased almost 4% in October, with sales up almost 3% for building materials. Sales at non-store retailers, primarily online sales, were up 4.0% in October. The only major segments where sales declined were clothing and accessories (-0.7%) and health and personal care stores (-0.6%). Restaurant sales were flat over the month; lingering concern about the pandemic and labor shortages that have caused restaurants to reduce their hours were drags.

Higher prices contributed to much of the increase in retail sales in October. But with the consumer price index up 0.9% for the month, much than the increase in sales, households also bought higher volumes of goods. Although consumers are concerned about inflation, and consumer confidence and sentiment are down over the past couple of months, households continue to spend. The positives for consumer spending are much larger than the negatives. In particular, households have about $2.5 trillion in extra saving relative to normal conditions, due to saved-up stimulus payments and extra unemployment insurance benefits, as well as limited opportunities to spend since the pandemic started. It may also be that news reports about potential shortages have led some shoppers to move up their holiday purchases. Other supports to consumer spending are an improving job market, including strong wage growth; extremely low-interest rates; and rising household wealth, thanks to increasing home values and stock prices.

It’s more important to look at what consumers do than what they say. They are concerned about higher inflation, in particular the recent big increase in gas prices. But they are still in good shape and are continuing to spend. PNC expects holiday spending to increase about 15% from last year’s depressed level as the economy continues to recover from the Viral Recession. Some of that increase will come from higher prices, but most of it will be from higher sales volumes.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.