U.S. retail sales rose 1.3% last month, a sign of resilience

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% in October from September, up from a flat reading in September from August. The increase was led by car sales and higher gas prices. Still, excluding autos and gas, retail spending rose a solid 0.9% last month.

Strong auto 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% in October from September, much less than the overall sales figure. The government’s solid report contrasted with gloomy figures 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.

Yet there are ongoing 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% in the July-September quarter from a year ago, the largest year-over-year increase in two decades, according to a report 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 the spring of 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 haven’t fallen. That suggests 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% at an annual rate, up from an earlier projection of 0.7%.

Strong consumer demand could perpetuate inflation, but other trends may work in the other direction. Auto sales jumped 1.3% last month, the retail sales report showed, but that gain, in addition to people replacing cars in Florida, partly reflects a clearing of supply chain problems that have made more auto parts and semiconductor chips available. Auto production has rebounded, leading to greater supply, which can push prices down.

Gas station sales jumped 4.1% last month, though that largely reflected higher prices. Online sales rose 1.2%, and restaurant and bar sales moved up 1.6%.

Still, the quick downturn at Target, which reported a 52% drop in profit in its third quarter compared with a year ago, shows how a combination of higher prices on food, higher interest rates, and growing economic uncertainty are taking its toll on some shoppers.

Sales weakened significantly in the weeks leading up to Oct. 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’re also buying smaller packages and trading down to instore 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% in October from a year ago, down from a peak of 9.1% in June but still a level that hasn’t been seen in 40 years. There are some signs that prices are likely to keep declining as many supply chain snarls have unraveled, boosting stockpiles of goods at many stores. Some chains may soon have to resort to discounting to clear excess merchandise.