We just got some positive data regarding the consumer, in the form of a really strong retail and food service sales report. Retail sales rose 1.3% in October, beating expectations for a 1% gain. On top of that, sales for prior months were also revised higher.

Now, one big reason was stronger gasoline sales, which was a function of pump prices rebounding. But sales were also strong across most other areas, including auto sales (more on this later), restaurant and bar sales, online spending, and even building materials.

One way to account for higher prices across several of these categories is to look at “real retail sales”, i.e. sales adjusted for prices. Real sales rose 0.8% in October, which is the fastest pace in 8 months. Real sales had slowed down in the summer (May-August), but it’s picking up again – a sign of rising “real” incomes thanks to a pullback in inflation. Real sales are now up 3% from December 2021 through October. And in real terms, consumers are spending 10% more than you’d have expected if you just extended the pre-pandemic trendline. That’s massive, and a bit of a surprise to be honest. At the beginning of the year, I expected goods spending to roll back to the trend as consumers switched to services. Which would ease pressure on goods prices as well. But consumers are still spending a lot on goods, and the good news is that goods prices are falling despite that!

And all of this is positive for GDP. Especially since consumer spending makes up about 70% of GDP.

While we have a lot of economists who forecast GDP, a widely followed forecast is made by the Atlanta Federal Reserve, called “GDPNow”. This forecast is continuously updated as the economic data rolls in, and after yesterday’s data releases, the forecast rose to 4.4% for Q4 GDP, with personal consumption contributing 3.3%-points to that headline number. But, if that indeed ends up being the contribution of personal consumption to GDP in Q4, it would be the highest we’ve seen since 2003 (outside the Covid recovery from 2020 Q3 -2021 Q2).

Now, these forecasts are highly uncertain and will almost certainly change as we get more data. Note that private forecasters predict around 0.5% growth in Q4 2022. So expect the final number to land somewhere in the middle.

Nevertheless, the trend is something to watch, not to mention the underlying drivers of growth – in this case, a strong consumer.

Add this to some of the positive data we’ve gotten over the past 2-3 weeks (and written about), including

  • Soft inflation data – both CPI and PPI (see here and here)
  • A strong labor market, including payroll data. And just this morning we got data showing that the insured unemployment rate is at 1%, which is close to a record low – this metric divides the number of people receiving unemployment benefits by the total number of employed workers covered by benefits
  • Strong auto sales and recovering auto production – this is a big one, and something I’ll write about soon

As I wrote the other day, there’s a lot of negativity in the air, but there’s also positive stuff happening. And it’s important to look at both sides, including what could go right.

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