US Retail Sales Report ahead of the Fed Meeting in December

Importance of Retail Sales Report

The US October Retail Sales report is one of the most important economic data releases and will be economic releases the Federal Reserve will review before its December 10 FOMC meeting to decide on its interest rates stance. The report is also crucial in helping us determine whether US consumers are still healthy and capable of driving more than a sluggish pace of economic growth.

Looking at the Bigger Picture: Things to also consider when looking at Retail sales report

  • Consumer spending data: To determine whether there is healthy demand
  • Labour market data: To see whether there is solid employment to support consumer spending and future retail growth
  • US Fed’s target inflation: To determine whether retail sales data supports a strong or weak inflation growth, and how this may impact Fed’s decision about interest rates in the future

Breaking down US Retail Sales

The US Commerce Department on Friday reported that retail sales increased 0.3% last month, driven mainly by motor vehicle purchases and higher gasoline prices – reversing September’s unrevised 0.3% drop, which was the first decline in seven months.

A closer look into retail sales figure shows auto sales increased 0.5% in October after declining 1.3% in September. Receipts at service stations also surged 1.1%, reflecting higher gasoline prices, after dipping 0.1% in the prior month. Online and mail-order retail sales increased 0.9% after gaining 0.2% in September. However, sales at electronics and appliances stores fell 0.4%.

Moreover, core retail sales (excluding automobiles, gasoline, building materials, and food services) also increased 0.3% in October, which was better than September’s core retail sales falling 0.1%.

How will retail sales impact the Fed’s decision on interest rates

Since core retail sales correspond most closely with consumer spending component of gross domestic product (GDP), the uptick in core retail sales may reflect better than expected economic growth in the US.

The rebound in retail sales also added to reports this week showing firming inflation in supporting the Fed’s signal that it will probably not cut interest rates again in the near term. Coupled with recent labour market data reflecting solid job growth in October (with the lowest unemployment rate in nearly 50 years) and an acceleration in the services sector activity, the Fed will likely keep interest rates at 1.50-1.75% in its next meeting (according to CME Group, 99.3% of market participants expect the Fed to maintain interest rates on Dec 10 while only 0.7% expect the Fed to lower by 25 basis points to 1.25-1.50%).

In addition, US consumer spending, which accounts for more than two-thirds of the economy, has been most resilient and increased by 2.9% annualised rate in the third quarter. Economists view this growth as healthy demand and will likely be a key support for US economic growth.

Figure 1: US Retail Sales beat forecasts amid a period of cooling retail sales growth