Retail Sales Stronger - Auto's Rise

After two stronger than expected retail sales reports, the October data were in line with expectations for modest growth outside the very volatile auto segment. Housing related segments posted large declines, as did sporting goods and hobby stores. The latter has been a strong performer in recent months, so the decline should not be taken seriously. Encouragingly, restaurant sales outperformed grocery stores. If sustained, this would suggest less consumer retrenchment.

Autos were the main story driving the large top-line increase. They recovered smartly following the post-clunker retreat in September. Sales are currently above their year-ago level, despite the possibility of some sales loss from clunker sales in August. This is a positive sign, as consumers are unlikely to make major purchases in times of major financial problems. Unfortunately, this positive sign is offset by the continued weakness in sales at housing related retailers. One reason could be the recent firming of home sales has not had time to boost retailer sales. Another is that consumers stretched so much to take advantage of the government incentive to purchase the home, they had nothing left for furniture or improvement.

Fundamentally, conditions remain poor for consumers, and spending will be limited. Wage income is more than 5% below its year-ago level and is not growing appreciably, although declines have ended. Wealth is substantially below its prior levels, although some of the pressure may have been removed by recent increases in equity and house prices. No further tax cuts or increases in government payments are legislated, although past actions continue to support disposable income. Asset income is still falling, although with the recession over, there are reasons to believe declines may be nearing an end.

Consumers remain financially constrained; they lack the cash to spend aggressively. However, there is also less reason for them to cut spending aggressively than there was six months ago. In this environment, spending will take a firmer tone than late last year or early this year, although consumers will not lead the recovery. Further, easing comparisons ensure improved year-ago results, with reports of growth likely to become more common.