Surprising Surge: September Retail Sales Skyrocket by 0.7%, Defying Expectations

Consumers displayed unexpected strength in September, surpassing expectations by boosting retail sales despite concerns about a weakening economy and high interest rates.

According to the advance report released by the Commerce Department on Tuesday, retail sales increased by 0.7% on the month, exceeding the estimated 0.3% growth predicted by Dow Jones. The rise in sales was partly driven by a 0.9% increase in gas station sales due to higher pump prices.

When excluding auto sales, the overall sales growth was still strong at 0.6%, outperforming the projected 0.2% growth. The control group, which excludes various sectors like auto dealers, gas stations, and office supply stores, also experienced a 0.6% increase.

It’s important to note that these numbers are not adjusted for inflation, indicating that consumers managed to keep up with price increases. In contrast, the consumer price index (CPI) released last week showed an inflation increase of 0.4% in September.

On a year-over-year basis, retail sales increased by 3.8%, slightly higher than the 3.7% increase for the CPI.

The release of the report led to higher Treasury yields and increased losses in stock market futures.

“The U.S. consumer cannot stop spending,” stated David Russell, global head of market strategy at TradeStation. “All three retail sales reports for Q3 were above estimates, which puts us on track for a strong GDP number later this month. It also gives the Fed zero reason to loosen policy, which keeps the 10-year Treasury yield pushing toward 5%.”

The increase in sales during September was widespread across various categories, with miscellaneous store retailers experiencing the highest rise at 3%. Online sales also saw a significant increase of 1.1%, while motor vehicle parts and dealers experienced a 1% increase. Food services and drinking places showed a solid growth of 0.9%, marking a yearly increase of 9.2% and leading all categories.

However, some categories did experience a decline, such as electronics and appliances stores, as well as clothing retailers, both of which saw decreases of 0.8% on the month.

The retail report plays a crucial role in shaping the Federal Reserve’s monetary policy. While the Fed is unlikely to raise interest rates in the near future, the unexpectedly strong consumer performance adds complexity to the equation.

In other economic news, the Fed reported a 0.3% increase in industrial production for September, surpassing the estimated 0.1% growth. Capacity utilization, which measures the level of potential output, also edged up to 79.7%, slightly higher than the estimate. Additionally, the Commerce Department reported a 0.4% increase in total inventories for August, exceeding expectations by one-tenth of a point.

Fed Chair Jerome Powell is scheduled to speak in New York on Thursday, and the markets will closely monitor his remarks for insights into future rate changes. The next meeting of the rate-setting Federal Open Market Committee is scheduled for October 31 to November 1.

Market pricing currently suggests a high likelihood that the FOMC will not raise rates during that meeting. However, future data showing continued economic strength could prompt rate hikes at subsequent meetings. The implied probability of a rate hike in December increased to about 43% following the release, compared to 34% on Monday, according to the CME Group’s futures market pricing gauge.

Consumers may face challenges toward the end of the year. Employment growth is expected to slow, although it has so far defied expectations. Credit card balances are increasing, with Bank of America reporting a 0.2% monthly gain in September balances. The resumption of student loan payments is also anticipated to impact spending.

However, the third-quarter economic growth is projected to be robust, with the Atlanta Fed’s GDP tracker showing a potential annualized gain of 5.1%.

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