Retail sales in the U.S. fall for first time in 7 months

Retail sales represent about one-third of all consumer spending and usually offer clues on the strength of the economy.

Economists predict sales during the holiday shopping season are likely to taper off after big gains in the past few years, but they still expect a solid 4% increase or so.

Key details: Auto dealers posted a 1% decline in sales to weigh down headline retail numbers. Auto sales account for about 20% of all retail sales.

Receipts at gasoline stations also slipped due to cheaper gas prices and less demand for fuel after the end of the summer driving season.

Retail sales rose a scant 0.1% when car dealers and gas stations are set aside, which gives a better idea of consumer demand.

Sales at internet retailers and bars and restaurants both rose slightly in October, indicating that consumers still have discretionary income to spend on wants instead of needs.

Taking a bit of the sting out of the October retail report, sales in September were also revised up to show a 0.9% gain instead of 0.7%.

Big picture: Consumer spending is all but certain to slow after one of the biggest increases in the third quarter in a decade.

Higher borrowing costs and still-troublesome inflation are squeezing the budgets of households. The holiday shopping season could end up being the softest in five years, the most recent forecasts show.

Yet rising wages and the lowest unemployment rate in decades could continue to fuel consumer spending and keep the U.S. out of recession. Household outlays drive about 70% of the U.S. economy.

Looking ahead: “Following last month’s large increase, the consumer has now returned to a more manageable level of spending, cutting back ahead of an important holiday season,” said Damian McIntyre, portfolio manager and head of multi-asset solutions at Federated Hermes.

“Overall, consumers are still spending,” Target Chief Executive Brian Cornell said in a Wednesday conference call.

Market reaction: The Dow Jones Industrial Average
DJIA
and S&P 500
SPX
were set to open higher in Wednesday trades.

Stocks rallied on Tuesday after a low reading on inflation gave hope that the Federal Reserve is done raising interest rates. Another weak wholesale inflation report added to the optimism.