The US economy cools with retail sales falling and monthly producer prices falling

The US economy cools with retail sales falling and monthly producer prices falling

  • Retail sales decreased by 0.1%; Revised September sales higher
  • Core retail sales increased by 0.2%; Data for September was revised upward
  • Producer prices fall by 0.5%; An increase of 1.3% on an annual basis

WASHINGTON (Reuters) – U.S. retail sales fell for the first time in seven months in October as car purchases and hobby spending fell, indicating a slowdown in demand at the start of the fourth quarter and strengthening expectations that the Federal Reserve (the U.S. central bank) will continue growth. I did raise interest rates.

This was supported by other data released on Wednesday that showed the largest decline in producer prices in three and a half years in October on the back of lower gasoline prices. The reports followed news on Tuesday that consumer prices were unchanged last month for the first time in more than a year.

This data, coupled with a cold labor market, has led economists to conclude that the US central bank’s current interest rate hike cycle is over. However, there is no sign that the economy is sliding into recession. The decline in sales in October was less than expected and came after three straight months of big gains.

“Signs of moderation in consumer demand and inflation call for a prolonged Fed pause,” said Lydia Boussour, chief economist at EY-Parthenon in New York. “Although we believe the Fed is done raising interest rates, the bar to cutting rates remains high.”

The Commerce Department’s Census Bureau said retail sales fell 0.1% last month. Data for September was revised upward to show sales increasing by 0.9% instead of the previously reported increase of 0.7%. Economists polled by Reuters had expected retail sales to decline by 0.3%.

Retail sales are mostly merchandise and are not adjusted for inflation. Sales were mixed last month, with auto and parts dealer revenues down 1.1%. Economists attributed some of the decline to the recently ended United Auto Workers strike, which would have had limited supply.

Furniture store sales fell by 2.0%, while revenues from outlets selling building materials and garden equipment fell by 0.3%. There was a 1.7% decline in sales at miscellaneous retailers. Sales of sporting goods, hobbies, musical instruments and bookstores fell 0.8%.

Reuters graphics

Clothing store sales were unchanged, while revenues at electronics and appliance outlets increased by 0.6%. Online sales rose 0.2%, despite Amazon’s (AMZN.O) second promotion.

Sales at food services and drinking places, the only services component of the report, rose 0.3%. Economists view eating out as a key indicator of a household’s financial situation.

Receipts also rose at health and personal care stores as well as food and beverage outlets. Although some of the decline in retail sales was an offset after the recent run of strong growth, it was also a sign that consumers are feeling the pinch of higher borrowing costs, with most low-income households relying on credit cards to finance purchases after their surplus has been exhausted. Savings accumulated during the COVID-19 pandemic.

Student loan repayments have resumed for millions of Americans, but recent data from the Bank of America Institute shows no sign yet that the change is negatively impacting spending.

Target (TGT.N) on Wednesday forecast holiday quarter earnings to be well above Wall Street expectations, but noted that consumers were putting off spending until the last minute, which CEO Brian Cornell said was “a clear indication of the pressures they face as they… They stretch their budgets until the next paycheck.”

Stocks on Wall Street continued to rise on Tuesday. The dollar rose against a basket of currencies. US Treasury bond prices fell.

Cooling consumer spending

Financial markets expect interest rates to be cut next May, according to CME Group’s FedWatch tool. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points to the current range of 5.25% to 5.50%.

Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.2% in October. Data for September was revised to show that so-called core retail sales rose 0.7% instead of the previous reading of 0.6%.

Core retail sales correspond closely with the consumer spending component of GDP. Economists expect inflation-adjusted consumer spending to grow at an annual rate of about 2% this quarter, half the 4.0% pace recorded in the third quarter.

The Federal Reserve Bank of Atlanta expects gross domestic product to rise at a rate of 2.2%, which is higher than what Fed officials consider a non-inflationary growth rate of about 1.8%. Growth in the fourth quarter is also likely to be supported by steady investment in inventory. The economy accelerated at a rate of 4.9% in the July-September quarter.

A separate report from the Labor Department’s Bureau of Labor Statistics on Wednesday showed that the producer price index for final demand fell 0.5% in October, the largest decline since April 2020. The producer price index rose 0.4% in September.

Economists had expected the producer price index to rise by 0.1%. In the 12 months to October, the producer price index rose 1.3% after rising 2.2% in September.

Reuters graphics

Wholesale commodity prices fell 1.4%, with a 15.3% drop in gasoline prices responsible for more than 80% of the decline. Commodity prices rose 0.8% in September.

The cost of services did not change after rising by 0.2% in the previous month. There have been increases in the costs of airfares, inpatient and outpatient care, as well as the transportation of goods by road. But portfolio management fees and motel and hotel room rates fell.

Airfare prices and portfolio management fees are among the components that go into calculating the personal consumption expenditures price indexes, the inflation measures the Fed tracks to reach its 2% target.

With CPI and PPI data available, economists estimated that the core personal consumption expenditures price index rose 0.2% in October after rising 0.3% in September. This will reduce the annual increase in the core PCE price index to 3.5%, which would be the smallest increase since April 2021, from 3.7% in September.

“Fed officials are having their cake and eating it too, so far,” said Christopher Rupke, chief economist at FWDBONDS in New York. “The economy is not too cold and not too hot. It’s OK right now.”

Reporting by Lucia Mutikani; Editing by Chizuo Nomiyama and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

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