Retail Sales Jump

One of our recent themes has been the underlying improvement in consumer confidence that has yet to manifest itself strongly in any of the headline numbers. There seems to have been a definitive change at the household level. Whether it has the strength to make a significant difference throughout the economy is yet to be discovered.

Today’s news of a strong September showing for retail sales, which grew 1.1% during the month off of upwardly revised figures for both July and August, suggests that consumers have, at last, shifted to a more upbeat mood and are willing to start spending at a higher rate. That bodes well for GDP, and may – only may – eventually help get unemployment down further.

The good news is that spending was not confined to any one category. Only department stores saw weakness seeing a drop of 0.2%, but beyond that all sectors experienced growth. One example of the breadth of the growth is the 1.3% jump in auto sales. In too many months during the crisis auto sales have performed well and have masked a more general weakness. This month, however, sales less autos still grew at a solid 1.1%, making September the best month for a while. Gasoline prices can also contribute to a skewed month, and in September spending at the pump grew 2.5%, but, again, non-gasoline sales were a strong 1.0%. So none of the usual caveats we use to caution ourselves about the sales figure seem to apply this time.

What does this mean?

Given that consumption accounts for about two-thirds of GDP, and given that retail sales are a rough, but not exact, proxy for overall consumption, we can expect the recent more robust trend in sales to imply stronger personal spending in the GDP accounts. This, in turn, implies a stronger third quarter GDP than the second’s anemic 1.3%, with growth being between 1.5% and 2.0%. That’s still not very good, but at least it’s going in the right direction.