November 15, 2010

Retail Sales Rose in October Ahead of Holiday Shopping

Most growth was in autos as consumers continued to spend carefully

Even before consumers begin their holiday shopping in earnest, U.S. retail sales in October posted their biggest increase in seven months, though the lion’s share of that gain was in auto sales.

The U.S. Commerce Department reported Monday that retail and food services sales in October rose 1.2% in the month, exceeding market consensus for a 0.7% increase. Excluding auto sales, however, retail sales rose only 0.4%, in line with economists’ expectations. The reported $373 billion in sales was 7.3% higher than sales in October 2009.

“Continued high unemployment, uncertainty surrounding tax legislation, and the continued bolstering of household balance sheets will keep pressure on personal consumption for quarters to come, but we expect modest growth to continue,” economists Thomas Simons and Ward McCarthy of New York-based investment bank Jefferies & Co. wrote in an analyst note.

The economists noted that the tone of the October data was weaker than the big headline number would imply.

“While overall growth of 1.2% is very solid, the source of the growth was a big increase in motor vehicles and parts, which was expected to be strong due to the big increase in the October vehicle sales data out earlier this month,” they said. “A look at a measure of discretionary spending, retail sales excluding autos, gasoline and building materials, shows significantly more modest growth at +0.2%. The recovery continues to be quite modest as consumers spend only as much as they absolutely need to.”

Stocks reacted to the news well, rising steadily in trading, with the Dow Jones industrial average up by 84.08 points at midday, 0.75% higher, at 11,276.66. The S&P 500 was up 7.75 points, 0.65% higher, at 1,206.96. The Nasdaq index was up 13.33 points, 0.53% higher, at 2,531.54.

Looking at the economy from the business side, the Commerce Department reported Monday that inventories of U.S. manufacturers, wholesalers and retailers rose 0.9% in September from August to a level of $1.4 trillion, their highest level since March 2009. Sales and shipments rose 0.5% to $1.1 trillion, their highest level since October 2008. Business inventories were 6.3% higher than in September 2009, and sales were up 8.9% since then.

The most recent month’s numbers show that inventory accumulation is steady and keeping pace with sales growth. Market consensus was for a 0.8% rise in inventories in September.

September's larger-than-expected increase in inventories and August's upward revision suggest the government might raise its preliminary GDP growth estimate when it publishes its first revision this month, according to a report from Reuters. Initial estimates put third-quarter GDP at an annual rate of 2.0%.

In other economic news that undercuts this data, the Empire State Manufacturing Survey released Monday by the New York Federal Reserve Bank indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. Consensus expectations were for a decrease to 14.

“The report was significantly weaker than even the most pessimistic forecast,” the Jefferies economists wrote, adding that the slump in activity in November is viewed as a temporary downshift by manufacturers in the region.

Nationwide, they noted, the manufacturing sector of the economy was very strong in the first half of 2010 and drove the economy out of the recession. “While there was an obvious slowdown in the pace of expansion in the second half and some regional differences in the pace of activity, we believe that the overall sector continues to expand modestly,” they wrote.

Read about consumer sentiment in November  at AdvisorOne.com.

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