Higher Retails Sales Inspire Cautious Optimism

The September surge in retail sales slowed in October, but there’s still no sign of recession in U.S. consumer spending. Total retail spending rose 0.5% last month on a seasonally adjusted basis. That’s a substantial deceleration from September’s 1.1% pop. But ignoring September’s unusual and unsustainable gain, October retail sales continue growing at a respectable clip. You can’t read too much into any one data point (or data series), but if you’re looking for clear-and-present signs of trouble for the business cycle you won’t find it here, at least not today.


Consumption decelerated in October, but it was the second-best month for growth since March. Even better, most corners of retail posted gains last month. That includes the cyclically sensitive realm of auto sales, which managed to rise 0.5%.

The annual pace of retail sales softened slightly last month to roughly 7.1%. Nonetheless, that’s still comfortably in territory that’s historically linked with economic expansions.

“The data are uniformly positive,” says Eric Green, chief U.S. economist at TD Securities. Today’s update on consumer spending “is more than enough to keep the economy going. They continue to push back the recession fears that began this summer.”
With the holiday shopping season here, there’s reason to think that consumption can continue to push higher. But if there’s a glitch in this happy scenario, it’s the recognition that October’s economic data doesn’t fully reflect the latest round of trouble in Europe via the deepening euro crisis.
The hope is that Europe’s troubles won’t infect the modest recovery in the U.S. Today’s retail sales report bolsters the case for this outlook. There’s certainly a tailwind in consumption in recent months, which will come in handy if the ill winds from Europe blow harder across these United States.
Dallas Fed President Richard Fisher sounds as if he’s discounting the possibility that Europe represents a new hurdle for the U.S. “We’re poised for growth,” he tells Bloomberg, opining that the odds of a new recession are “negligible.” He predicts GDP will rise 2.5% to 3% in the fourth quarter and “gradually” rise from there.
Was the late-September recession call by the Economic Cycle Research Institute premature? The latest data from ECRI seems to be leaning in that direction, although the consultancy hasn’t officially changed its forecast.
Reasonable minds can still differ on what comes next. As the San Francisco Fed warns, it’s still too early to dismiss the recession risk if you consider the worst-case scenario:

Gathering storms across the Atlantic threaten a U.S. economy not yet recovered from the last recession… Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.

So, yes, there’s some good news in today’s retail sales figures. But optimism still has a short shelf life these days as we remain dependent on the kindness of the next update.

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