U.S. retail sales jump, surprising economists

American consumers ramped up their spending last month in a sign of robust health heading into the crucial holiday shopping season.

Retail sales rose 0.8% in October, after an upwardly-revised 1% gain in September, the Commerce Department said Tuesday. The two-month increase was the largest since the spring of 2014.

The numbers suggest that the economy may grow more quickly in the final three months of the year than many economists had expected. Retail sales are closely watched as a sign of consumer health. Consumer spending makes up about 70% of the economy.

Steady hiring and emerging signs of solid pay increases may have made Americans more confident and willing to spend. The unemployment rate fell last month to a low 4.9% and, in October, workers saw the biggest annual pay gain since the end of the recession.

Plus, while many companies, such as Dunkin Donuts, blamed their own weak sales figures in the late summer and fall on consumer concerns surrounding the election, Tuesday’s figures show that the presidential campaign had little impact overall.

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“If electoral uncertainty were restraining activity prior to last Tuesday, it is nowhere apparent in the consumer spending data,” JPMorgan Chase economist Michael Feroli said.

Revisions to September and August data indicate that consumers spent more than previously estimated in the July-September quarter, Feroli said. That means growth in the third quarter may have been as high as 3.2%, he estimated, above the 2.9% figure reported last month.

Royce Mendes, director at CIBC World Markets, says in a release, “We were forecasting a healthy advance in U.S. retail sales today, but October’s data easily surpassed even our bullish expectations, with upward revisions to the prior month adding to that positive sentiment.”

He adds, “While August’s flat reading on core sales leaves the 3-month annualized trend only tracking 2.1%, the recent uptick bodes well for a healthy Q4 reading on consumption. All told, this should be bearish for fixed income and bullish for the dollar.”

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Data highlights

Some of the biggest sales increases were in autos and gas, with higher prices boosting gas station sales. Even excluding those categories, however, sales rose 0.6% in October and 0.5% the previous month.

Auto sales rose a healthy 1.1%, though many dealers relied on steep discounts. Sales of home and garden supplies also rose 1.1% in October, a positive sign that more Americans are remodeling and expanding their homes.

Home Depot, the nation’s biggest home improvement chain, upped its outlook for the year Tuesday after beating Wall Street expectations handily. Customer transactions jumped, as did the amount they spent on each visit, the company said.

Most other retailers also saw healthy increases: Grocery stores, health and personal care outlets, sporting goods retailers, clothing stores, and online and catalogue retailers all reported strong sales.

Online and catalogue retailers are continuing to seize market share from older-line outlets such as department stores. Online and catalogue sales have increased 12.9% in the past year, much faster than the 4.3% gain for all retailers. Department stores, meanwhile, have seen their sales plunge 7.3% in the past 12 months.

Furniture stores were one of the few to report a drop in October, with sales falling 0.9%.

Steady hiring may be boosting spending. Employers have added about 175,000 jobs a month this year, down from last year’s pace but still enough to push unemployment even lower over time.

That appears to be boosting consumer confidence, which has been mostly healthy in recent months. A measure of consumer sentiment by the University of Michigan rose in the first half of November.

Even with solid growth in the October-December quarter, the economy has been weak this year. It expanded at just a 1.1% pace in the first six months of 2016. It accelerated to a 2.9% pace in the July-September quarter.

Even with a healthier expansion in the fourth quarter, growth may not reach 2% for the full year.

In other news…

U.S. businesses boosted their stockpiles by a slight amount in September, while their sales increased by the most in three months.

The Commerce Department says business inventories edged up 0.1% in September, slower than the 0.2% gain seen in August. But sales were up a solid 0.7% , double the 0.3% rise in August. It was the best showing since a 1% gain in June.

The gain in sales was evidence that the economy is gaining strength after a sluggish period at the beginning of the year.

Overall economic growth, as measured by the gross domestic product, increased at an annual rate of 2.9% in the July-September quarter, double the 1.4% GDP gain in the second quarter.

Economists expect solid growth this quarter.