Retail sales data surged in October as holiday shopping started early for the second year in a row. The strong month, which followed a flat month in September, suggested that, at least for now, a recession was not at hand.
Sales grew by a stronger-than-expected 1.3% with broad-based increases. Nine of the 12 categories rose, according to data released by the Commerce Department on Wednesday.
Spending on gasoline, autos, food, and online purchases led the categories partly because of higher gasoline and food prices and a second Amazon Prime Day in October. Real sales volume was also up by a sharp 0.8%, according to our estimate.
The surge in both sales and volume numbers was also driven by retailers offering more discounts than usual as excess inventories continued to grow and a slowdown in demand loomed. Excess savings were also a cushion helping consumers to spend more for the holiday.
The control group—which excludes autos, gasoline, building materials and food services, and is a better indicator of the trend—increased by 0.7% from an upwardly revised 0.6% in September.
This suggests that spending growth in the last quarter will most likely continue to stay strong, pushing any recession risks into next year.
As retail sales data represents mostly spending on goods—which has slowed markedly in recent months—the data should understate overall spending since service spending remains significant.
There are signs, though, that retail sales may soon wane as the two most important tailwinds—excess inventories and excess savings—will most likely be depleted after a robust holiday season, giving no more cushion for consumers to fall back to.
The outlook for spending will not be rosy next year. We expect a slowdown as restrictive monetary policies have an effect on borrowing costs. With consumer spending accounting for 70% of total gross domestic product, the risk of a recession next year is growing.