Insights + Resources

Did Retail Sales Change the Market Narrative?

Nov 18, 2022

Were Retail Sales Too Good?

Nominal retail sales in October rose 1.3% from a month ago, strongly beating expectations. Market watchers like to transform this nominal report into an inflation-adjusted estimate, which better corresponds to other real economic gauges. Deflated by the Consumer Price Index (CPI), real retail sales rose 0.8% in October, the highest real monthly rate since February.

Investors negatively interpreted the report, likely focusing on the risk that the Federal Reserve (Fed) may have to keep tightening monetary conditions. However, momentum is slowing as the economy transitions to a new year. Consumers will have less tailwind from surplus savings, which increases the risk that 2023 could be a tough year for economic growth.

Was this report too good for central bankers who are trying to stifle demand to tamp down inflation? Probably not, but they need to wait until the comprehensive spending report is released next month.

A Slowing Trajectory

Consumer spending is slowing, and investors will get a better view on the consumer when the Personal Consumption Expenditure (PCE) report is released on December 1. As shown in the chart below, annual growth rates for both real retail sales and real PCE have slowed for most of this year. Retail sales focus mostly on goods, whereas the full spending report includes both goods and services.

View enlarged chart

Nominal online retail sales rose 1.2%, as the shift to ecommerce during the pandemic is likely a permanent change in consumer buying preferences. This shift has long-term ramifications for business planning and could be especially relevant for equity analysts who are preparing to sift through upcoming holiday sales reports. The rise in the control group suggests the economy was off to a good start in the third quarter. The control group is the category the Bureau of Economic Analysis (BEA) uses for Gross Domestic Product (GDP) calculations.

Excluding autos and gas, nominal retail sales rose 0.9%, demonstrating that the consumer sector is not currently in recession.


Strong real retail sales in October suggest consumers are likely turning to credit to support spending as wage growth lags inflation and high prices are eating away from the stock of savings. Overall debt rose $351 billion in Q3, putting the total debt burden for households at $16.5 trillion according to data released by the New York Fed.

The economy is slowing, but we are not yet in recession. However, rising credit demand implies recession risks are rising for the first half of 2023. This latest report was good but not too good for the Fed to downshift the pace of rate hikes in upcoming meetings.

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