Retail Sales Rise More than Expected; Powell Warned of Cautious Approach to Rate Cuts

This morning, retail sales rose 0.4% in October, a tenth of a percentage point more than expected and following an upwardly revised 0.8% increase in September (revised up from a 0.4% gain initially reported). Year-over-year, retail sales increased 2.9% in October, the largest annual gain in three months.

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Car sales rose 1.6% in October following a 0.2% increase the month prior, and gasoline stations sales ticked up 0.1% in October following two consecutive months of decline. Excluding autos, retail sales rose 0.1% at the start of Q4 and climbed 2.7% over the past 12 months. Excluding autos and gasoline, retail sales rose 0.1% in October and increased 3.8% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales fell 0.1% in October, down from the 1.2% gain in September and the first monthly decline since August. Over the past 12 months, however, control group sales rose 3.6% following a 4.1% annual gain in September.

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In the details of the report, food and beverage sales rose 0.1%, and general merchandise sales increased 0.2%, despite a 0.2% decline in department store sales. Also, non-store retailer sales gained 0.3%, and building materials sales ticked up 0.5% at the start of the fourth quarter. Additionally, eating and drinking sales rose 0.7% following a 1.2% gain in September, and electronics sales jumped 2.3% in October following two consecutive months of decline.

On the other hand, clothing sales declined 0.2%, and health and personal care sales fell 1.1% in October, as did sporting goods sales. Also, furniture sales fell 1.3%, and miscellaneous sales slipped 1.6% in October.

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Bottom Line: A stronger-than-expected showing in retail spending underscores the storyline of a persistently resilient consumer, perpetuating solid economic conditions. While broadly feeling the weight of higher prices and borrowing costs as well as near-term disruptions from the hurricanes, improvements in income as well as access to other supplemental factors, such as credit cards, continue to provide welcome support to consumer spending. Down from a more robust pace of 3.6% last year, at the current trend of 2.3%, this remains sufficient to signal ongoing support to broader economic activity. ?

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Yesterday, the PPI rose 0.2% in October, as expected and following a 0.1% increase the month prior. Year-over-year, producer prices rose 2.4% in October, slightly more than the 2.3% increase expected and up from the 1.9% annual gain in September. At 2.4%, this marks the largest annual increase since July.

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Food prices fell 0.2% and energy prices decreased 0.3% in October, marking the third consecutive monthly decline. Excluding food and energy costs, the core PPI rose 0.3%, a tenth of a percentage point more than expected and following a 0.2% increase in September. Year-over-year, the core PPI increased 3.1% in October, up from the 2.9% annual gain in September and the largest annual increase in four months.

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On Wednesday, the CPI rose 0.2% in October, as expected and following a similar increase in September. Year-over-year, consumer prices rose 2.6%, also as expected and up from the 2.4% annual increase in September. At 2.6%, this marks the largest annual increase in three months and the first time since March that the annual rate was higher than the previous month’s rate.

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Food prices rose 0.2%, while energy prices were unchanged in October following two consecutive months of decline. Excluding food and energy costs, the core CPI rose 0.3% in October, as expected and following a similar gain in September. Year-over-year, the core CPI increased 3.3% for the second consecutive month.

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Another iteration of inflation, the supercore – defined as core services excluding housing – rose 0.3% in October following a 0.4% rise the month prior. Over the past 12 months, the supercore increased 4.4%, up from the 4.3% annual increase in September and the largest annual gain in two months.

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Bottom Line: Inflation continues to run hot with little improvement in core consumer prices since June and an acceleration in producer prices in October. Coupled with resilient and, in some cases, robust consumer spending as noted above, resulting in a solid pace of domestic activity, stubbornly sticky price pressures underscore the need for a slow and tempered pace of policy adjustment going forward. Already reducing the size of rate cuts between September and November, any further “surprises” in the inflation data could warrant a reduced pace as well, meaning a potential pause by January or even as early as next month.?

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Speaking earlier in the week, on Tuesday, Minneapolis Fed President Neel Kashkari echoed the need for an ongoing focus on the evolving data.?While he still expects to move forward with a third round cut in December, Kashkari emphasized that the Fed will remain data dependent and ultimately the incoming inflation data will determine the Fed’s appropriate policy pathway.?

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“If we saw inflation surprises to the upside between now and then, that might give us pause,” Kashkari said at a conference hosted by Yahoo Finance. “It’d be hard to imagine the labor market really heats up between now and December. There’s just not that much time.”

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Taking the stage yesterday at a Dallas Fed event, Federal Reserve Chairman Jerome Powell characterized recent domestic activity as “remarkably good,” potentially affording Committee members the flexibility to lower rates?at a controlled and tempered pace, as there is no “hurry” to adjust rates lower.??

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"The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully. Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve,” Powell said.

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Highlighting the ongoing disinflationary improvement in the U.S., Powell was clear that more progress is still needed to meet the Feds 2% goal, and that the Committee is committed to finishing the job.?“With labor market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2 percent objective, albeit on a sometimes-bumpy path,” Powell said.

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Also on the economic calendar yesterday, initial jobless claims fell 4k to 217k in the week ending November 9, the lowest since May, suggesting the temporary impact from the recent hurricanes has largely dissipated from the data. The four-week average, meanwhile, declined from 227k to 221k, also the lowest since May. Continuing claims, or the total number of people claiming ongoing unemployment, fell from 1.88M to 1.87M in the week ending November 2.

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Additionally, this morning, the Empire Manufacturing Index jumped from -11.9 to +31.2 in November, the highest reading since December 2021. In the details of the report, prices received rose from +10.8 to +12.4, new orders increased from -10.2 to +28.0, and inventories climbed from a reading of -7.5 to +1.0 in November. On the other hand, prices paid ticked down from +29.0 to +27.8, and the number of employees decreased from +4.1 to +0.9. Additionally, the six-month general business conditions index declined from +38.7 to +33.2 in November, a two-month low.

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Also, this morning, import prices unexpectedly rose 0.3% in October, the largest monthly increase since March and following two consecutive monthly declines. According to the median forecast, import prices were expected to decline 0.1%. Export prices, meanwhile, unexpectedly jumped 0.8% at the start of Q4, the largest monthly gain since August 2023 and following a 0.6% decline the month prior. According to the median forecast, export prices were also expected to decline 0.1%. Over the past 12 months, import prices rose 0.8%, while export prices dropped 0.1% in October, the third consecutive annual decline.

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Finally, this morning, industrial production declined 0.3% in October, a tenth of a percentage point less than expected and following a 0.5% decrease the month prior. Meanwhile, capacity utilization fell from 77.4% to 77.1% at the start of the fourth quarter, largely due to declining output in manufacturing activity as a result of the Boeing strike.

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Next week, the economic calendar begins on Monday with a look at the NAHB Housing Market Index, followed by October housing starts and building permits.

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Last month, starts fell 0.5% in September and declined 0.7% year-over-year, while permits dropped 2.9% in September and decreased 5.7% on an annual basis, marking the eighth consecutive month of an annual decline. This month, starts are expected to again fall for the month, down 1.0% in October, potentially resulting in a 1.8% decline year-over-year. Permits, on the other hand, are expected to rise 0.5% in October, but still potentially mark an annual decline, off 6.5%.

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On Wednesday, weekly mortgage applications, along with the Philadelphia Fed Business Outlook Index for November.

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Later in the week, on Thursday, weekly jobless claims, the October Leading Index, October existing home sales, and the November Kansas City Fed Manufacturing Index will be released.

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On Friday, the final November S&P Global U.S. Manufacturing, Services, and Composite PMIs, along with the final University of Michigan Consumer Confidence Index, which is expected be revised down a point to a reading of 72.0 in the final November report.

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Finally, on the Fed-speak front, we’ll hear from a number of Fed officials throughout next week including Chicago Fed President Austan Goolsbee and Cleveland Fed President Beth Hammack. As the Fed continues to highlight the strength of the economy and lingering risks to inflation, investors will be listening closely for any indications as to what Fed officials are forecasting for the final policy meeting of the year and further, looking out to 2025.

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-Lindsey Piegza, Ph.D., Chief Economist?

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