U.S. Analysis

The Bottom Line: 

This morning’s retail sales report is stale, but it gives us a snapshot of how the US consumer fared ahead of the government shutdown. It also tells us that consumers may be on pause now that the pre-tariff pull-forward period has ended. US retail sales rose +0.2% m/m in September, which was in-line with our own forecast but below consensus of +0.4% m/m. After stripping out autos, building materials, gasoline, and restaurant spending, the control group measure declined (-0.1% m/m), suggesting lower-and-middle income consumers may be running out of steam after months of front-loading. 

Here’s what stood out to us in this morning’s report: 

1) We saw a pullback in trade-exposed sectors that have been rallying since Liberation Day in April. Spending on clothing, sporting goods, and hobbies weakened after tariff front-loading strengthened activity in the summer months. Spending on electronics and appliances also weakened. Furniture sales, on the other hand, held up, but this was a price effect, since spending growth would be roughly flat without the impact of higher furniture prices shown in the September CPI print.

2)  Non-store retail sales contracted in September (-0.7% m/m) – for the first time in nine months.Non-store retailers are growing their share of retail sales- about 17% of retail sales and food services spending vs. 12% pre-pandemic. This is a catch-all that encompasses spending on online platforms and increasingly, we know that consumers are purchasing trade-exposed products on these platforms at the cost of retail sales baskets.  While one month does not make a trend, we will be closely watching this sector in the months to come as a good indication of the health of the US consumer.

3) Spending on food services and drinking places held up in September (+0.7% m/m) – suggesting that the upper end of the K in a K-Shaped economy is continuing to drive consumer spending. As wealthier households have witnessed a boom in liquid assets and non-labor income becomes increasingly important, we expect services sector spending will remain positive, since this group is less sensitive to tariff price pressures and weaker wage growth. 

The Broader Context: 

• Post liberation day, we have witnessed a massive uptick in sales at miscellaneous stores retailers. Used merchandise stores, which fall under miscellaneous retail sales, have witnessed immense growth relative to one year ago (+18% y/y as of August), which suggests financially conscious consumers are opting to buy goods second-hand.   

• Spending in trade-exposed sectors like clothing, clothing accessories, and sporting goods ramped up meaningfully post-liberation day (though this month’s slide is noted in the chart).  In many cases, the pace of spending in trade exposed sectors has outpaced restaurant spending since Liberation Day. Because restaurant spending is driven by the upper end of the K and continued to be the standout, we expect trade-exposed goods sector strength is reflective of front-loading and price effects. 

• After adjusting for inflation, real retail sales have been relatively flat since Liberation Day (+0.3%) while nominal sales have risen 1.6%. 

On the Fed:

• At the October FOMC meeting, Chair Powell  acknowledged that a pause was on the table for the December 10th meeting in the midst of data visibility challenges. We will not have data for October or November ahead of the meeting, and while we still expect a pause in December, the September retail sales print, if anything, will support a more dovish lean to consensus amidst a very divided Fed. A rise in permanent layoffs and softer retail sales spending suggests that US consumers are losing steam. We expect that the resulting uptick in the unemployment rate (to 4.4%) will help the doves plead their case.

• Still, this morning’s PPI data and the most recent employment report, both covering September, painted mixed pictures. Core PPI surprised to the downside (-0.1% m/m) but the details looked mixed beneath the surface, with transportation, warehousing, and food prices surging. Some health care components – which factor into PCE – moved notably higher. Despite an uptick in the unemployment report, nonfarm payrolls posted a material upside (+119K vs. 51K consensus) and cyclically exposed sectors looked stronger. But, this report was seemingly at odds with the household survey’s upside to the unemployment rate. 

• The mixed data has done nothing to lift the fog. In our view, the most prudent choice for the Fed would be to slow down and take a pause.

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About the Authors

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is an economist and a member of the macroeconomic analysis group. She is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.

Imri Haggin is an economist at RBC Capital Markets, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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