U.S. retail sales increased 0.4% in September, higher than expected; economy remains resilient

The U.S. Department of Commerce recently released a report indicating that consumer spending remained robust in September, highlighting the resilience of the economy, further bolstered by support from the Federal Reserve. This lends credence to the notion that the economy is maintaining a strong growth pace in the third quarter.

According to the advanced report, retail sales rose by 0.4% in September, surpassing the unadjusted growth of 0.1% in August and exceeding the Dow Jones forecast of 0.3%.

Excluding automobiles, sales grew by 0.5%, significantly outperforming the projected growth of just 0.1%. It is important to note that these figures are seasonally adjusted but have not been adjusted for inflation, which saw a 0.2% increase according to the Consumer Price Index (CPI) this month.

The report underscores that consumers, who drive nearly two-thirds of U.S. economic activity, continue to spend, even as the labor market displayed some signs of weakness throughout the summer.

In retail, spending at grocery stores increased by 4%, clothing stores saw a rise of 1.5%, and bars and restaurants reported a 1% growth in spending. These gains helped offset declines at gas stations, which saw a 1.6% drop due to falling fuel prices, as well as a 3.3% decrease in electronics and appliance stores and a 1.4% decline in the furniture and home goods sector.

While signs of economic recovery may not prevent the Federal Reserve from lowering interest rates again next month, they do reinforce expectations for a modest 25 basis point cut.

Amid growing concerns regarding the labor market, the Fed embarked on a easing cycle last month, significantly reducing the policy rate by half a percentage point to a range of 4.75%-5%. The Fed had previously raised rates by 525 basis points in 2022 and 2023 to combat inflation.

Strong income growth, ample savings, and robust household balance sheets continue to support spending and the overall economy. Even though labor market trends may be cooling, layoffs remain at historically low levels, supporting wage increases.

Retail sales, excluding automobiles, gas, building materials, and food services, grew by 0.7% last month, with August’s growth adjusted to still reflect 0.3%. These so-called core retail figures closely correlate with consumer spending within the Gross Domestic Product (GDP).

The anticipated economic growth rate for the third quarter is about 3.2%, following a growth rate of 3.0% in the second quarter.