We’ve had several weeks of strong data since the Federal Reserve cut policy rates by a half percentage point. It started with a surprisingly robust jobs report, followed by a janky and above-expectations inflation report. Thursday’s above-consensus retail sales numbers complete the trifecta, further fueling the narrative that central bankers erred in cutting policy rates as much as they did last month and risk reigniting inflation.
That’s the wrong takeaway, and the resultant spike in bond yields may well prove fleeting — at least if elections and geopolitics don’t get in the way.
Let’s start with the retail sales news. The nominal value of retail purchases rose 0.4% in September from a month earlier, exceeding the median forecast in a Bloomberg survey for a 0.3% increase, the Commerce Department data showed. Control group sales — which feed into gross domestic product — rose 0.7% instead of the forecast 0.3%.
That’s a solid result, but it’s a stretch to suggest that it’s too good. Unadjusted retail sales actually fell in September both from August and the same month a year earlier, so seasonal, holiday, and trading-day adjustments did a ton of heavy lifting in shaping the perception of this number. In effect, lower September sales got adjusted upward because there was one less Friday and Saturday, and because Labor Day fell earlier in the month, theoretically pulling some spending into August. I’m not a seasonal-adjustment conspiracy theorist, but it’s important to know that a lot of the month’s retail story was generated by a model. This was a good month to mind the margin of error (+/- 0.5 percentage point).
In general, the totality of the data suggests that US consumption growth has slowed from its feverish pace and has been back to more or less its normal pre-pandemic pace. Meanwhile, research shows middle- and upper-income consumers are driving the gains, while lower-income consumption has been somewhat anemic. If you believed that we were on the cusp of a dangerous reacceleration, you would want strong empirical evidence to make that argument, and September’s retail sales simply aren’t that.
