U.S. retail sales rose more than expected in September despite high interest rates, indicating robust economic growth in the third quarter.
The seasonally adjusted retail sales increased by 0.7 percent, slightly below August's revised 0.8 percent growth. When factoring in the 0.4 percent increase in consumer prices for September, inflation-adjusted retail sales were up 0.3 percent last month.
The figures rose 3.8 percent year-on-year per September, compared with the 3.7 percent increase for the CPI.
Spending grew across most categories, with specialty stores (up three percent), online sales (up 1.1 percent) and car sales (up 1.1 percent) leading the way.
Food services and drinking places — considered a key financial indicator of household finances — saw a 0.9 percent sales increase. Receipts also rose at health and personal care, general merchandise and food and beverage stores.
Auto sales grew faster in September, rising 1.0 percent after a 0.4 percent increase in August. Following the rising gas price, gas station sales were up 0.9 percent. According to Bill Adams, chief economist at Comerica Bank, the U.S. Energy Information Administration recorded "a jump in gasoline inventories in the last several weeks."
However, sales dropped 0.8 percent for electronics and appliances, 0.2 percent for building materials and garden supplies, and 0.8 percent for clothing. Meanwhile, sales at furniture stores, sporting goods, hobbies, musical instruments and bookstores remained the same.
With sales increasing, businesses are increasing their inventory investment. In August, business inventories rose by 0.4 percent, the most since December, compared to a 0.1 percent increase in July. These growing inventories may boost GDP in Q3 after being neutral in April-June. The government's preliminary GDP estimate is due next Thursday.
Debt woes
Despite rising sales, many consumers still rely on debt to fund purchases. Bank of America reported a 0.2 percent monthly gain in September balances. Still, rising borrowing costs due to inflation control measures by the central bank led to an 11-year high in credit card delinquencies.
In October, millions of Americans resumed student loan payments, which economists estimate accounts for 0.3 percent of disposable personal income.
If the trend persists, the third-quarter economic growth will be robust. Goldman Sachs raised its forecast for third-quarter GDP growth to four percent annualized following the release of the data.
"With employment high, wages outpacing inflation, and recession talk quieter, consumer spending is growing and propelling the economy forward," wrote Adams in an analyst note.
However, there is a risk that energy prices will continue to rise should the conflict in the Middle East escalate and reach a broader region. CNN reported that this situation could further tighten the oil supply, push inflation and erode Americans' spending.
Possible rate hikes
While markets anticipate the end of rate hikes for this cycle, surprisingly strong consumer spending may prompt the Federal Reserve to prolong the monetary tightening. Fed Chair Jerome Powell is set to address the public on Thursday in New York, and the financial markets are eagerly awaiting any insights into the future direction of interest rates.
Markets expect the Fed to hold rates steady in December, but the implied probability of a hike rose to 43 percent after robust retail sales data, up from 34 percent on Monday.
The possibility of further hikes in interest rates sent yields soaring. Short-term Treasury yields jumped to their highest level in 17 years on Tuesday. Meanwhile, the two-year yield rose to 5.20 percent, and the 10-year yield climbed near 4.85 percent.