The next major clue about the state of the U.S. economy arrives on Tuesday with the October update for retail sales. When we lasted checked in with this metric, consumption had rebounded sharply in September, chasing away a fair amount of the recession blues. The year-over-year pace in retail sales remained encouraging as well, suggesting that the business cycle wasn’t set to take a tumble. But income growth hasn’t kept pace, which raises questions about spending’s staying power. Meantime, the European currency crisis has deepened, casting a shadow over expectations here and abroad.

Nonetheless, analysts remain optimistic that October retail sales will post modest gains after September’s strong rise. Briefing.com reports that the consensus forecast anticipates a 0.4% rise in retail sales last month vs. The latest Bloomberg survey also reflects expectations of higher consumption:

Retail sales probably rose in October and U.S. manufacturing accelerated, helping give the world’s biggest economy a boost entering the final months of 2011, economists said before reports this week The 0.3 percent rise in purchases would follow a 1.1 percent gain that was the most in seven months, according to the median forecast in a Bloomberg News survey ahead of Commerce Department figures on Nov. 15.

“The message I want to give you here today is that I think the consumer fundamentals are improving,” says Alan Gayle, senior investment strategist at RidgeWorth Investments, via the Richmond Times-Dispatch. Perhaps, but other analysts are warning that tomorrow’s update could come perilously close to zero. UniCredit’s forecast, for instance, calls for a razor thin rise of just 0.1%.
The burning question is whether the ongoing euro crisis is spilling over into the U.S. by putting a dent in consumer sentiment? The answer remains unclear for the moment. Nonetheless, the accelerating trouble in Europe “seems to be coming to a head right at the time the U.S. economy is at its most vulnerable,” observes Mark Vitner, a Wells Fargo economist.
But the holiday shopping season is upon us and perhaps that’s the economy’s salvation. Tomorrow’s data point will provide a critical preview, for good or ill.