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As the saying goes, you can’t stop a runaway train. That seems to be the case with consumer spending. Retail sales surged 0.8% in September, more than double expectations and the best monthly performance since the beginning of the year. Third quarter sales rose 0.7%, the strongest quarterly activity since the second quarter of 2022. Even when adjusted for inflation, spending rose 0.3%, enough to suggest it wasn’t just higher prices pushing up sales. All this data adds up to one thing – the consumer feels confident enough in his or her income and the economy to keep spending. Ten of the 13 major categories posted gains, with only electronic stores, building materials and clothing sales coming in negative. Spending at restaurants and bars, the only service industry in the index, rose 0.9%, more than double the prior tally. As much as economists are waiting for the consumer to rein in spending, America doesn’t appear to be giving up on its number one pastime – shopping.
Key Indicators this Week
Beige Book – According to the Federal Reserve Beige Book, “the near-term outlook for the economy was generally described as stable or having slightly weaker growth.” The report is a summary of business activity from regional business contacts across the 12 Federal Reserve Districts. The anecdotes, from a variety of industries, highlighted discrepancies between the robust economic data we receive monthly and what is happening on the ground in real-time. Most districts reported little to no change in economic activity since the previous report. Prices continued to increase at a modest pace overall, but businesses are struggling to pass along higher input costs to consumers. The labor market was described as moderating, with multiple firms reporting modifying compensation packages with remote work or less sign-on bonuses to offset higher labor costs. Companies were finding less pushback from job candidates on lower wage offers.
FedSpeak – The message from the Fed this week was “wait and see.” Almost all of the more than 10 Fed officers who spoke this week, including Federal Reserve Chair Jerome Powell, advocated for more time to decide if another rate increase would be necessary at the November meeting or later. Everyone acknowledged that inflation has come down, but it is too soon to know if the trend will continue. Federal Reserve Bank of Richmond President Thomas Barkin described the current dilemma best: “We are walking a fine line – if we under correct, inflation re-emerges. If we over correct, we do unnecessary damage to the economy.”
The final words came from Powell, himself. Speaking at the Economic Club of New York, Powell suggested the central bank can afford to leave interest rates unchanged at the upcoming meeting while leaving the door open for a future hike, if needed. Citing the uncertainties and risks to the economy at this time, Powell said the committee is “proceeding carefully.” The Chair said the recent increase in Treasury yields could lessen the need for further rate hikes, adding that he does not believe current monetary policy is too tight. Powell suggested the recent surge in yields (key Treasury yields are the highest in over 16 years) is mostly due to rising term premiums as investors are demanding more yield for the risk of owning longer dated securities. The yield curve steepened to -17 basis points from -73 basis points a month ago. The next Fed decision is scheduled for November 1. Odds are for no change in November with a growing possibility for a hike in either December or January. Hike or not, the Fed is still insistent on keeping interest rates higher for longer.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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