Americans stepped up their spending at retailers, restaurants, and auto dealers last month, a sign of consumer resilience as the holiday shopping season begins amid painfully high inflation and rising interest rates.
The government said Wednesday that retail sales rose 1.3 percent in October from September, up from a flat reading in September from August. The increase was led by car sales and higher petrol prices. Still, excluding cars and petrol, retail spending rose a solid 0.9 percent last month.
Strong car sales may have been supercharged by the arrival of Hurricane Ian in late September, which destroyed up to 70,000 vehicles, according to economists at TD Securities.
Even adjusting for inflation, spending increased at a solid pace. Prices rose 0.4 percent in October from September, much less than the overall sales figure. The government’s solid report contrasted with gloomy figures on Wednesday from retail chain Target, which announced unexpectedly weak profits as its increasingly price-sensitive customers pulled back on spending.
Steady job growth, rising wages, and higher savings after many people cut back on travel and entertainment during the pandemic have enabled surprisingly steady spending by consumers, particularly those with higher incomes.
Economists pointed to two other factors that likely contributed to the gain: Amazon held another Prime Day promotion last month, and California distributed inflation relief checks of up to $1,050.
Turning to credit cards
Yet there are continuing signs that cracks are forming in consumers’ ability to keep up with the highest inflation in four decades. More households are relying on credit cards to pay bills, with nationwide credit card balances jumping 15 percent in the July-September quarter from a year ago, the largest year-over-year increase in 20 years, according to a report on Tuesday from the Federal Reserve Bank of New York.
“Consumers are likely turning to credit to support spending as wage growth lags inflation and high prices are eating away from the stock of savings,” said Jeffrey Roach, chief economist for LPL Financial.
And research last week from Bank of America found that consumers are increasingly seeking out cheaper options when it comes to groceries and dining out. Transactions by Bank of America customers, using credit and debit cards, show that they are now visiting cheaper fast food restaurants more often than full-service restaurants, after eating at both equally for about a year after early 2021.
The Bank of America report also found that, adjusting for inflation, grocery spending per household has fallen sharply, to below pre-pandemic levels, even though visits to grocery stores have not fallen. That suggested many people are seeking out cheaper options when shopping for food.
Still, analysts said Wednesday’s government report on retail sales points to a healthier economy than previously expected. Morgan Stanley revised its forecast for growth in the October-December quarter to 1.7 percent at an annual rate, up from an earlier projection of 0.7 percent.
Strong consumer demand could perpetuate inflation, but other trends may work in the other direction. Car sales jumped 1.3 percent last month, the retail sales report showed, but that gain, in addition to people replacing cars in Florida, partly reflected a clearing of supply chain problems that have made more car parts and semiconductor chips available. Car production has rebounded, leading to greater supply, which can push prices down.
Petrol station sales jumped 4.1 percent last month, though that largely reflected higher prices. Online sales rose 1.2 percent, and restaurant and bar sales moved up 1.6 percent.
Still, the quick downturn at Target, which reported a 52 percent drop in profit in its third quarter compared with a year ago, showed how a combination of higher prices on food, higher interest rates, and growing economic uncertainty have been taking a toll on some shoppers.
Sales weakened significantly in the weeks leading up to October 29, the end of the most recent quarter, with more customers refusing to pay full price and waiting for sales, said Target’s chairman and CEO Brian Cornell. They were also buying smaller packages and trading down to store brands. That trend pushed quarterly profit far below the expectations of both Target, and Wall Street.
By contrast, Walmart, the world’s largest retailer, reported strong sales growth Tuesday in its third quarter. Yet that likely occurred as more shoppers, including higher-income ones, sought out its cheaper groceries.
The company said that consumers are trading down to private brands in baby items and baking goods, among other categories. It is also seeing wealthier customers. About three-quarters of Walmart’s market share gains in food came from customers with annual household incomes of $100,000 or more, the company said.
Inflation reached 7.7 percent in October from a year ago, down from a peak of 9.1 percent in June but still a level that has not been seen in 40 years. There are some signs that prices are likely to keep declining as many supply chain snarls have unravelled, boosting stockpiles of goods at many stores. Some chains may soon have to resort to discounting to clear excess merchandise.