US Retail Sales Expected To Boost Q4 Economic Rebound Forecast

The sharp slowdown in US economic growth in the third quarter (driven by weaker consumer spending) surprised economists, but the case for a rebound in Q4 is building. A key factor in the upbeat forecast: projections that consumer buying will bounce back. Next week’s update (Nov. 16) on retail sales for October is expected to offer more support for managing expectation up.

Economists are looking for a third straight monthly gain for retail spending in October, based on the consensus point forecast published by TradingEconoimcs.com. If correct, the projected 0.7% monthly advance (matching September’s increase) will mark the first time in a year that spending has advanced three months in a row.

Data from other sources also point to a solid gain for retail spending in October. The Chicago Fed’s weekly estimate of retail activity reflects an ongoing rise in spending through mid-October. Using these numbers as a guide (blue line in chart below) suggests that next week’s monthly release (red line) will show a gain for October.

Visa’s US Spending Momentum Index (SMI) is also hinting at firmer consumer spending for October. SMI, a measure of spending based on credit card data, edged up 1.9% last month – the first monthly increase since July. The gain lifted the index to 110.6. A reading above 100 indicates strengthening consumer spending. “This month’s SMI reading supports our view that consumer spending is set to bounce back in the fourth quarter,” says Wayne Best, Visa’s chief economist.

The Atlanta Fed’s GDPNow model is also projecting a stronger Q4 (as of Nov. 10). The nowcast for GDP’s change in the current quarter is a strong 8.2%, a dramatic improvement over Q3’s modest 2.0% increase. Another real-time estimate of Q4 GDP is also pointing to a solid if somewhat slower rebound via Now-casting.com’s 5.1% increase (Nov. 5).

While the trend is looking favorable at the moment, Tthe hotter-than-expected inflation report for October is a risk factor for the economy. Headline consumer prices rose 6.2% year over year in October, the biggest increase in 30 years. “Inflation is clearly getting worse before it gets better, while the significant rise in shelter prices is adding to concerning evidence of a broadening in inflation pressures,” advises Seema Shah, chief strategist at Principal Global Investors.

But now that we’re about halfway into Q4, any inflation threat of substance for economic activity will likely show up in Q1:2022 and beyond. Meanwhile, the case for a Q4 revival in growth is building and next week’s retail sales numbers for October are expected to support the upbeat outlook.

“There is considerable momentum heading into the holiday shopping season,” says Matthew Shay, president and CEO of the National Retail Federation, a trade group. “Consumers are in a very favorable position going into the last few months of the year as income is rising and household balance sheets have never been stronger. Retailers are making significant investments in their supply chains and spending heavily to ensure they have products on their shelves to meet this time of exceptional consumer demand.”


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