- Retail sales in October 2013 rose a stronger than expected 0.4% following unchanged activity in September that was revised upward from the previously estimated 0.1% decline.
- Some of the unexpected strength resulted from motor vehicle sales rising a strong 1.3% in the month.
- Some offset was provided by sales at gasoline stations dropping 0.6% and by building material stores sinking 1.9%.
- Control retail sales, which exclude sales at auto dealerships, gasoline stations and building material stores, encouragingly rose a stronger than expected 0.5% in the month.
- The solid rise in October retail sales and the elimination of the monthly decline in September were encouraging. They were consistent with our view that fourth-quarter consumer spending is likely to strengthen to an annualized 2.4% from the 1.5% growth recorded in the third quarter of 2013. This strengthening in consumer spending has occurred despite the political turmoil, and attendant economic uncertainty, taking place in Washington as Congress and the Administration battle over reining in fiscal imbalances. Some easing of these pressures have emerged in recent weeks although only the result of deadlines being delayed rather than met. Thus, the risk remains that political uncertainty could re-emerge late this year and early in 2014. With inflation remaining quiescent, our expectation is that Fed policy will remain on hold to allow the economy to better weather these potential future headwinds.
- In a separate release, consumer prices in October 2013 unexpectedly dropped 0.1% in the month with gasoline prices down 2.9%, and both core and food prices only inching up 0.1%.
Nominal retail sales in October 2013 were stronger than expected, rising 0.4% in the month relative to an expected increase of only 0.1%. This followed unchanged activity in September, which represented a slight upward revision from the previously estimated 0.1% decline.
Expectations had been that overall nominal sales would be restrained by indications of declining gasoline price. Sales at service stations dropped 0.6% although we had assumed an even greater decline. As well, motor vehicle sales were expected to show a slight decline based on earlier indications of moderating unit sales although they as well surprised on the upside, rising a robust 1.3% that fully offset the 1.2% decline in September. Unexpected weakness emerged in the building materials component that sank 1.9% in the month.
The so called ‘control’ measure, which excludes sales at motor vehicle dealerships, gasoline stations, and building material stores, and also feeds directly into the GDP add up, rose a stronger than expected 0.5%. This followed a 0.3% gain in September although reflected a downward revision from a previously estimated 0.5% gain. A number of retail sales components showed solid increases over 1% in the month, including sporting goods (1.6%), clothing (1.4%), and furniture (1.2%).
The solid rise in October retail sales and the elimination of the monthly decline in September were encouraging. In part, they reflected motor vehicle sales remaining at a high level and were consistent with growth in the durables component of consumer spending increasing by almost 5%, at an annualized rate, in the fourth quarter of 2013. Stripping out the volatile motor vehicle component along with service stations and building material, control retail sales still managed to increase an impressive 0.5% thereby building further onto a solid 0.3% gain in September. Thus, today’s report does not alter our view that fourth-quarter 2013 consumer spending is likely to strengthen to an annualized 2.4% from the 1.5% growth recorded in the third quarter.
This strengthening in consumer spending is encouraging and consistent with indications of solid job gains in recent months that are expected to persist to the end of the year. Strengthening in both spending and hiring has occurred despite the political turmoil, and attendant economic uncertainty, taking place in Washington as Congress and the Administration battle over reining in fiscal imbalances. Some easing of these pressures has emerged in recent weeks although only with the result of deadlines being delayed rather than met. Thus, the risk remains that political uncertainty could re-emerge late this year and early in 2014. With inflation remaining quiescent, our expectation is that Fed policy will remain on hold to allow the economy to weather these potential headwinds better. This is certainly the case with respect to fed funds that is unlikely to be raised from its current range of 0% to 0.25% until sometime in 2015; however, it is also expected to result in the Fed’s current pace of asset purchases of $85 billion per month being maintained until the spring of 2014.
In a separate report, consumer prices for October 2013 showed slightly greater than expected weakness by dropping 0.1% in the month relative to expectations of unchanged prices. This in part reflected a sizeable 2.9% drop in gasoline prices (sending energy prices down 1.7% in the month) although both food and core prices rose a minimal 0.1% in the month. On a year-over-year basis, the overall consumer price index (CPI) is only up 1.0% in October, which is down from 1.2% in September. The annual increase in core prices remained unchanged at 1.7%. Thus, inflation persists below the Fed’s objective of 2%.
RBC