US retail sales increased more than expected in September, driven by increased motor vehicle purchases and spending at restaurants and bars. This data supports expectations of economic growth accelerating in the third quarter. However, the Commerce Department report suggests that strong demand could lead to the Federal Reserve hiking interest rates in December. The economy is getting used to the new normal of higher interest rates, as shoppers continue to spend.
Retail sales rose 0.7% last month, up from 0.6% in August. Despite the resilience, consumer headwinds are rising, with higher borrowing costs and credit card delinquencies reaching an 11-year high. Millions of Americans resumed payments on student loans in October, which is estimated to be around 0.3% of disposable personal income. The Federal Reserve has another rate hike this year up on their forecast board, and they will need to use it if the economic data continues to surprise economists.
The US economy created 336,000 jobs in September, driven by a tight labour market and higher excess savings accumulated during the COVID-19 pandemic. US stocks opened lower, and the dollar rose against a basket of currencies. Retail sales rose a solid 0.6%, excluding motor vehicles and gasoline stations. Online sales jumped 1.1%, likely to rise further in October after Amazon’s Prime Day promotion. Sales at food services and drinking places increased 0.9%, while health and personal care, general merchandise, and food and beverage stores also saw increases.
However, consumers cut back on purchases of big-ticket items like electronics and appliances, with sales at these outlets falling 0.8%. Retail sales rose 0.6% in September, with core retail sales gaining 0.2% instead of 0.1%. Consumer spending is expected to accelerate in the third quarter, thanks to a surge in July. Spending on services remains solid, which should lift overall consumption. Gross domestic product growth estimates for the third quarter are currently as high as a 5.1% annualized rate.
The US economy grew at a 2.1% pace in the April-June quarter, despite the Fed’s 525 basis point hike since March 2022. Morgan Stanley’s chief economist, Ellen Zentner, noted that consumer spending momentum increased in the third quarter and underlying strength may continue into the fourth quarter.