Retail sales jump in October in sign of US economic strength. Too much for the Fed?

The numbers: Sales at retailers jumped 1.3% in October, signaling US consumers are still spending plenty of money despite efforts by the Federal Reserve to slow the economy.

Retail sales were forecast to rise 1.2% last month, according to economists polled by The Wall Street Journal. That’s the biggest increase in eight months.

Receipts rose a robust 0.9% if auto dealers and gas stations are excluded. Auto and gasoline purchases can exaggerate the ups and downs in overall retail spending.

Retail sales are a large part of consumer spending and offer clues on the strength of the economy. Sales rose in almost ever major retail segment in October.

Yet a large part of the increase in spending over the past year is due to inflation. Sales have risen 8.3% in the last 12 months vs. a 7.7% increase in the cost of living.

Key details: Auto and parts sales rose 1.3% last month, partly because of car owners replacing vehicles destroyed or damaged by Hurricane Ian.

Receipts at gas stations also shot up 4.1% because of an increase in oil prices.

Setting aside auto dealers and gas stations, retail sales still rose a strong 0.9% last month — well above the increase in inflation. That gives a better picture of retail sales trends.

One category economists watch closely is bars and restaurants, the only service sector in the retail report. Restaurant sales surged 1.6% last month and are rising twice as fast as inflation.

Restaurant sales tend to rise when the economy is healthy and Americans feel secure in their jobs. Sales usually flatten out or decline in more troublesome times.

Big picture: High inflation, rising borrowing costs and a slowing economy have put a dent in retail sales, but not enough to keep Americans from cutting back much.

The Fed wants to see a further reduction in consumer demand to help get inflation under control. If the economy does not slow enough, the central bank could raise interest rates even more aggressively than it plans.

That’s why retailers face a tougher environment despite the strong sales report in October. The large retailer Target TGT,
-14.58%,
for instance, said on Wednesday it will cut expenses by up to $3 billion as it confronts “softening sales and profit trends.”

Looking ahead: “We still think the economy will slide into a mild recession in the first half of next year,” said chief North American economist Paul Ashworth of Capital Economics, but “much more of this from the US consumer, and we might be in for a soft landing after all.”

Market reaction: The Dow Jones Industrial Average DJIA,
-0.06%
and S&P 500 SPX,
-0.57%
were seen to open lower in Wednesday trades.

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