U.S. Retail Sales Weak in the Front, Strong in the Background

September was not a good month for dining out.  Retails sales surprised analysts by gaining only 0.1 percent, well below the consensus 0.5 percent estimate as  new car sales were offset by the largest decline in restaurant reciepts in nearly two years.  Sales were 4.7 percent higher on the year. 

The retail sales 'control group', a category that is used by the government to calculate gross national product and excludes food service, automobiles, building materials and gasoline, rose 0.5 percent, slightly over the 0.4 percent forecast, according to Commerce Department data.  These 'core' numbers suggest strong consumer spending has not been affected by rhetoric over the trade dispute with China or weakness in the housing market.  Consumption has been supported by a 3.7 percent unemployment rate, the lowest in 49 years, and solid if not spectatular growth in wages.  Core sales for August were revised to flat from 0.1 percent. 

The economy expanded at at 4.2 percent annual pace in the second quarter and the robust control number should keep the economy in high gear.  The current projection from the Atlanta Fed's GDPNow model posits 4.0 percent pace for the third quarter.  Retail sales represent just under half of the consumption of U.S. households and they tend to be volatile month to month. 

Ten of 13 major retail groups showed improvement in September further indicating that the third quarter ended on a strong note. The 1.8 percent drop in purchases from food-service and drinking spots may have been affected by damage and flooding from Hurricane Florence in the Carolinas which hit on September 14th. Online shopping continued its decade long climb, rising 1.1 percent following August's 0.5 percent increase.  Auto sales  surged 0.8 percent after dropping 0.5 percent in August. 

Strong economic growth, gradual improvement in wages and steady inflation near its 2 percent target have enabled the Fed to persist in returning  interest rates to a more 'normal' level. The September hike brought the upper target for the Fed Funds rate to 2.25 percent. The economic projection materials posed one more 25 basis point increase this December and three more to the end of 2019.

Chart: FXStreet