The U.S. household continues to demonstrate strength through domestic retail sales, though at a decelerating pace. The October increase of 0.3 percent in top-line retail sales and the control estimate that feeds into the calculation of domestic gross domestic product reaffirm that the consumer remains on a solid footing heading into the critical holiday spending season.
The American consumer is still spending, though not as much…
As long as the American consumer continues to spend at a 2% to 2.5% seasonally adjusted annualized rate, and as long as trade tensions don’t worsen with China or expand to European autos, concerns about a recession can be temporarily put to rest. Under this scenario, the economy should continue to grow around its long-term trend of 1.8%. This data also tends to support the Federal Reserve’s policy of holding interest rates steady, which we expect to remain unchanged throughout 2020.
Given the substantial back revisions that are the norm in retail sales data, we prefer to use the three-month average annualized pace of spending to understand the true underlying trend. This data implies that spending peaked in May 2019 and has decelerated to a still strong 4.3% pace of spending, which the control data implies a 4% pace of household outlays. This supports our baseline call on the direction of spending and the economy.
A closer look at the data shows that spending on gasoline increased 1.1%, which indicates that investors and policymakers should anticipate a quarterly spending increase near 2.5%. The major drags on outlays in October were declines in spending on furniture, electronics, building materials, clothing, sporting goods and eating and drinking establishments. The major drivers of spending were the proxy for e-commerce, general merchandise, food and beverages.
