The October retail sales report, released last week, served up a flat headline retail sales figure that shocked economists on the downside at first blush. Though at first glance this seems concerning, a deeper look shows some underlying optimism that will likely boost consumer spending in Q4. The miss on the headline of 0.0% was largely the result of an expected decline in automobile sales. That said, the report’s underlying numbers are in line with holiday sales projections and even suggest a strong start to Q4.
The report noted an unexpected drop in auto sales, which dropped 1.6% in October. This decrease is attributed to a rebound effect. It comes on the heels of an anticipated boom in purchases that came before the tariff imposition and before the expiration of certain tax credits. Given the outsized importance of automotive sales to total retail, this sharp decline pulled the overall headline results down. When we take auto sales out of the equation, the data paint a much more positive picture.
Encouraging Trends in Consumer Spending
Without auto sales, retail numbers in fact beat the market forecasts by showing a bit of an increase. The control group sales, which exclude the most volatile items like automobiles and fuel, rose by 0.8%. This increase shows that the strong demand for goods more generally continues, and that consumers are still spending in the face of uncertainty and higher prices.
So what is it that the retail sales report is giving us insight into? That points to a higher fourth quarter personal consumption expenditure (PCE) growth rate than the low 1.0% that had been anticipated. These indicators are key to unpacking the consumer sentiment narrative. Each year, they shine a light on spending trends that help set the economic mood heading into the holidays.
Implications for Holiday Sales Forecasts
That leaves the October retail sales report as the very high starting point for what holiday sales are, in recent years usually a key time for most retailers. For reference, analysts had predicted less than 1% CAGR for Q4 consumer spending. With the very positive signals from the underlying retail stats, there is hope for better-than-expected holiday shopping.
Using higher frequency data there are signs that some of this spending will slip into November and December. Retailers need to be on their toes as they get through this crucial two-month period that can make or break an entire year for many retailers.