Retail sales strong, but for how long?

This week was a slower news week, allowing the interest rate markets to find a stable level to hold. Rates followed suit and were relatively flat through the week. All eyes are really looking toward the events of early November: the October Jobs Report from the Bureau of Labor Statistics (BLS), the Federal Reserve (“Fed”) meeting with another potential rate cut, and Election Day. It isn’t likely that rates will have much significant movement until we are past these important events. This week did give us a couple of important reports that can give us a preview of where inflation is trending.  

Consumer spending is the lifeblood of our economic growth. As people spend, business can grow, and more jobs and higher wages can be found. Retail Sales is a good indicator of this spending. The September Retail Sales numbers came in stronger than expected at 0.4% and the core number that strips out car sales and gas rose 0.7%, also stronger than expected. This would bode well for the economy and future GDP. There are two wrinkles in this seemingly good report. First, most of the spending is on credit. Credit utilization percentages are up significantly, and eventually, people will no longer be able to spend. Second, the report utilized a very large seasonal adjustment. This was actually the second-largest seasonal adjustment in a decade. Both reasons could undermine the strength of this strong number.

CoreLogic gave us their monthly rental numbers. Blended Rents, which includes new and continuing rents, rose 2.4% when compared to August 2023. This is down from 2.8% previously. In previous reports from Apartment List and other vendors, we have also seen that new rents are continuing to trend lower. This is great news for inflation as rent is the largest single component of shelter and shelter is the biggest single component in both major inflation reports: CPI and PCE. The issue has been that the shelter number that shows in the current reports doesn’t match the current rental numbers and is much higher. It takes time for the current rental numbers to reflect in the reported shelter numbers. This effect is called “lag.” As the lag catches up, we will see inflation continue to decline.

Looking Ahead:

Next week will see a couple of reports as we get closer to the beginning of November’s events:

• Monday: Leading Economic Indicators
• Wednesday: Existing Home Sales, Fed’s Beige Book
• Thursday: Initial and Continuing Unemployment Claims, New Home Sales
• Friday: Univ. of Michigan Consumer Sentiment