November 16, 2022

Retail sales was rose 1.3% in October after having been unchanged in September. In the past year retail sales have climbed by 8.4%.  Consumers are still spending at a moderate pace but inflation is eroding their purchasing power (see discussion of real retail sales below).

Motor vehicle sales rose 1.3% in October after declining 0.3% in September.   There continue to be the widely discussed chip shortages which are acting as a brake on sales.  Once supply chains problems are resolved that brake on car sales should disappear.  For now car sales seem to be fairly steady with some bouncing around from month to month.

Retail sales ex autos and gas, which eliminates the two most volatile components and is a better gauge of the trend pace of sales, rose 0.9% in October after rising 0.6% in September.  The consumers’ pace of spending has slowed slightly in recent months. In the past year this series has risen 4.5% but in the past three  months it has risen at a 9.6% pace.  Consumer spending continues at a respectable pace. The object for the Fed is to reduce the pace of economic activity so that the unemployment rate actually rises slightly from its current level of 3.5% at least to the 4.0% mark (which is widely regarded as the full employment threshold) but preferably somewhat higher at about 4.5%.

Restaurant sales rose 1.6% in October after climbing 0.9% in September.   In the past year restaurant sales have risen 13.5%.  Consumers seem perfectly willing to go out to a restaurant.

Sales at nonstore retailers rose 1.2% in October after climbing 0.6% in September.  In the past year nonstore sales have risen 11.7%.  Once again, the consumer seems quite willing to keep spending.

The problem is that inflation has been rising almost as quickly as sales and, as a result, real retail sales — sales adjusted for the increase in inflation — have risen 0.6% in the past year.  Our income has been rising and we keep spending, but the amount of goods and services we are able to purchase with our fatter paycheck has risen only slightly relative to what it was a year ago.

Also, keep in mind that retail sales tells us something about consumer spending on goods — which has been relatively flat for more than a year.  But the place where consumers have been spending money has been on services like traveling which has boosted airfares and hotel spending, dining out, and the like.  In the past year real spending on goods has declined 0.4% .  Real spending on services has risen 3.0%.  However, in the past three months that pace of spending has slowed to 1.8%.  The economy is slowing, but thus far the slowdown has been gradual.

GDP declined in each of the first two quarters of this year.  However, we expect GDP growth in the second half of the year likely to average 1.0-1.5%.  We also anticipate GDP growth of 1.0% in 2023 as real interest rates remain negative until mid-year and as supply chain difficulties continue to heal.

Stephen Slifer


Charleston, SC