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V-Shaped Rebound in Retail Sales Continues

Karl Schamotta October 16, 2020

US consumers spent far more than expected in September even as government stimulus evaporated and a third wave of coronavirus infections forced a number of states into heightened lockdowns. Data released by the Census Bureau this morning show that retail sales volumes increased +1.9% after a downwardly/upwardly revised 0.6% increase in the prior month. Consensus estimates had been set at +0.7%.

Back-to-school spending contributed to an +11% jump in clothing purchases and a +10% increase in department store receipts, and sales rose in 12 of 13 major categories. Restaurants and bars saw a 2.1% increase month-over-month.

“Control group” sales – with food services, car dealerships and building materials excluded – rose +1.4%, beating forecasts for a +0.3% print. The less-volatile control group number is often considered more representative of underlying fundamentals.

With households repairing balance sheets by paying down debt and socking money away through the pandemic, economists had hoped to see spending surge at some point. In comments after a speech on Wednesday, Federal Reserve Vice Chairman Richard Clarida said, “We have a lot of accumulated saving and I think that will be a tail wind for the economy when we get to the other side of this”.

Overall retail sales are up 5.9% over September 2019, and are well above pre-pandemic levels – although it should be noted that the measure’s heavy focus on tangible goods fails to capture the consumer spending dynamics at play in the broader services sector. Card payment indicators show that categories like health care, travel and hospitality continue to suffer spectacular devastation as customers avoid in-person interaction.

Treasury yields snapped slightly higher on the report, but currency markets shrugged, leaving the trade-weighted dollar up a little over +0.5% on the week.

Of course, this muted reaction may also be attributable to the shift in political calculus that has occurred in recent weeks as the likelihood of a “blue sweep” of both houses of Congress and the executive has risen. With polls and betting markets increasingly favoring Joe Biden’s Democrats, hawkish Senate Republicans have begun to put up strong resistance against additional fiscal stimulus spending, and positive data prints – like today’s – could solidify that opposition.

This could weigh on the economy’s momentum in the months ahead. With nominal per capita income likely to drop in the absence of new stimulus, permanent job losses continuing to rise, bankruptcies accelerating, and the pandemic entering a new and dangerous third wave, it is obvious that the American economy has a long way to go before the all-clear can be sounded.

Karl Schamotta
Chief Market Strategist