US Retail Sales: September's Consumer Spending Under Inflation's Shadow

Key Takeaways on US Consumer Spending

• Expected slowdown in September retail sales growth.
• Persistent impact of inflation on lower-income household spending.
• Cooling labor market and the potential for Federal Reserve interest rate cuts.

At 9:30 PM Beijing time on Tuesday, the US Census Bureau will release the US retail sales data, an indicator known as "the terror data." The data, delayed by over a month due to the government shutdown, is expected to show a slight slowdown in consumer spending in September. This might suggest that American households may have reached their spending limit after months of inflationary shocks. Additionally, the risk of cooling consumer spending remains as many employers scale back hiring.

According to the median forecast in a Bloomberg survey, economists expect retail sales to grow by 0.4% in September, after a 0.6% increase in the previous month. This slight pullback could be an early signal of a more sustained correction in consumption following strong spending over the summer.

Economists say that the strong momentum of consumer spending is unlikely to continue as financial pressures intensify. Discretionary spending is primarily supported by high-income consumers enjoying the benefits of this year's stock market gains. For lower-income individuals, the rising prices of many essential goods are placing a heavy burden on them.

High Prices Force Consumers to Cut Back

US inflation has eased from its extreme levels in 2022, but the prices of many everyday necessities remain stubbornly high. For millions of Americans, this translates to constrained budgets at a time when wage growth is slow and struggling to keep pace with inflation. Grocery, rent, gasoline, and household utility expenses still account for the highest proportion of household income in 50 years; little money is left for non-essential spending.

The latest research from the University of Michigan highlights this pressure. Under the dual impact of high prices and stagnant savings, consumer expectations for personal financial prospects have reached their most pessimistic level since 2009. Concerns about unemployment have also risen to a five-year high – suggesting that households may soon shift from cautious spending to full-blown austerity.

The income gap is widening. The willingness of wealthy consumers to spend remains strong, buoyed by the stock market boom. Retail giants like Walmart and Gap have reported robust quarterly sales, partly due to attracting more value-conscious or discount-seeking affluent customers.

However, for lower-income groups, the situation is markedly different. Home improvement retailers, including Home Depot, indicate that consumers are postponing large purchases and home renovation plans. These trends together paint a clear picture: even if Americans want to spend, many are no longer able to stretch their budgets further.

Labor Market Woes Drag on Consumption Growth

As a key underpinning of economic growth, the US labor market is cooling. As business owners become more cautious, hiring activity is slowing. Many companies are cutting expenses by slowing hiring and investment, or using automated technologies to reduce labor costs.

The Federal Reserve's Beige Book, to be released later this week covering October to early November, is expected to confirm the weakening economy. Analysts anticipate that the report will show weaker hiring activity, a pullback in business activity, and increased caution across multiple industries.

Bloomberg economists wrote that labor market conditions have improved slightly after hitting a low point in the summer. However, the partial federal government shutdown in October dealt a fresh shock to hiring and consumer spending. "Overall, we think the Fed is able to cut rates in December, and probably should, to sustain the fragile recovery that started in the summer."

Several other important economic indicators will also be released this week. September's Producer Price Index, durable goods orders, and weekly initial jobless claims data will provide a more comprehensive view of the economy's health as it enters the post-Thanksgiving holiday period.

Retailers are now preparing for "Black Friday," potentially the biggest shopping day of the entire year. While major brands are gearing up for a surge in sales, early indications suggest that consumers may be entering the holiday shopping season with an uneasiness rarely seen in recent years.