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U.S. retail sales surge as Americans kick off holiday shopping, brighten economic outlook

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales surged in October as Americans eagerly started their holiday shopping early to avoid empty shelves amid shortages of some goods because of the ongoing pandemic, giving the economy a lift at the start of the fourth quarter.

The solid report from the Commerce Department on Tuesday suggested high inflation was not yet dampening spending, even as worries about the rising cost of living sent consumer sentiment tumbling to a 10-year low in early November. Rising household wealth, thanks to a strong stock market and house prices, as well as massive savings and wage gains appear to be cushioning consumers against the highest annual inflation in three decades.

“It’s more important to look at what consumers do than what they say,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “They are concerned about higher inflation, but they are still in good shape and are continuing to spend.”

Retail sales jumped 1.7% last month, the largest gain since March, after rising 0.8% in September. It was the third straight monthly advance and topped economists’ expectations for a 1.4% increase. Sales soared 16.3% year-on-year in October and are 21.4% above their pre-pandemic level.

Several of the top U.S. retailers this week have noted an earlier start to holiday shopping. While this could lead to declines in November and December, economists and retailers expect holiday sales this year will be the best in a while.

“Today’s numbers show that consumers are getting a jump on their holiday shopping,” said Matthew Shay, president of the National Retail Federation in Washington. “We continue to urge consumers to shop early and shop safely, and we fully expect this holiday season to be one for the record books.”

Retail sales are mostly made up of goods, with services, including healthcare, education and hotel accommodation, making up the remaining portion of consumer spending. The nearly two-year long COVID-19 pandemic has caused an acute shortage of labor, delaying deliveries of raw materials to factories as well as shipments of finished goods to markets.

October’s broad increase in sales partly reflected higher prices as monthly consumer inflation surged 0.9% in October, which boosted the annual rate to 6.2%.

Stocks on Wall Street were trading higher on the data and also as Walmart forecast a strong holiday quarter. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

BROAD GAINS

Sales were led by motor vehicles, with receipts at auto dealerships advancing 1.8% after gaining 1.2% in September. The rise reflected the first increase in unit sales in six months, as well as higher prices. The tight supply of automobiles because of a global semiconductor shortage is driving up prices.

Sales at service stations increased 3.9%, boosted by more expensive gasoline. Online retail sales rebounded 4.0%. Receipts at building material stores advanced 2.8%. There were also increases in receipts at furniture outlets as well as sporting goods, hobby, musical instrument and book stores. Sales at electronics and appliance stores rebounded 3.8%.

But sales at clothing stores fell 0.7%. Sales at restaurants and bars were unchanged despite an ebb in COVID-19 infections, driven by the Delta variant. Restaurants and bars are the only services category in the retail sales report. These sales were up 29.3% from last October.

Economists speculated that either high inflation was forcing consumers to cut back on eating out or that spending had permanently shifted in favor of goods.

“If services spending has largely recovered, strong goods demand increasingly looks to be a structural shift in consumer preferences, rather than a temporary COVID-related outcome,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.

Excluding automobiles, gasoline, building materials and food services, retail sales shot up 1.6% last month after rising 0.5% in September. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Adjusting for inflation, retail sales are up at a roughly 5% annualized rate from the third-quarter average.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity rose at a tepid 1.7% rate last quarter. Economists at JPMorgan boosted their fourth-quarter GDP growth estimate to a 5% rate from a 4% pace. Goldman Sachs raised its estimate by 0.5 percentage point to a 5.0% rate. The economy grew at a 2% rate in the third quarter.

The economic picture was further brightened by a separate report from the Federal Reserve on Tuesday showing manufacturing output surged 1.2% last month to its highest level since March 2019, after falling 0.7% in September.

“The economy has thrown off whatever lethargy it might have had in the summer, and it is growing quite strongly,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.

Businesses are also making steady progress replenishing depleted inventories, which should help to keep factories humming and support the economy. Business inventories increased 0.7% in September, a third report from the Commerce Department showed.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

U.S. goods trade deficit hits record high in March

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. trade deficit in goods jumped to a record high in March, suggesting trade was a drag on economic growth in the first quarter, but that was likely offset by robust domestic demand amid massive government aid and easing pandemic stress.

Economic activity in the United States has rebounded more quickly compared to its global rivals. The pent-up demand is drawing in imports, eclipsing a recovery in exports and keeping the overall trade deficit elevated. The report from the Commerce Department on Wednesday also showed inventories at retailers fell sharply in March, underscoring the strong domestic demand.

“The widening in the goods deficit suggests that trade will be a drag on first-quarter GDP,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “This won’t be a big issue, as other parts of the economy are still doing well, such as business investment in equipment and consumer spending.”

The goods trade deficit surged 4.0% to $90.6 billion last month, the highest in the history of the series. Exports of goods accelerated 8.7% to $142.0 billion. They were boosted by shipments of motor vehicles, industrial supplies, consumer and capital goods, and food.

The jump in exports was offset by a 6.8% advance in imports to $232.6 billion. Imports rose across the board. There were large gains in imports of motor vehicles, industrial supplies, consumer goods and food. Capital goods imports also rose solidly.

“The goods deficit will start to shrink by the end of 2021 and into 2022,” said Bill Adams, senior economist at PNC Financial in Pittsburgh, Pennsylvania. “As the pandemic comes under control in the United States, American consumers will spend less on imported goods, shrinking imports, and foreigners will buy more U.S. exports as their economies recover further.”

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury prices were mixed.

The report was published ahead of Thursday’s advance first-quarter gross domestic product data, which is expected to show the economy grew at a robust 6.1% annualized rate in the first three months of the year after expanding at a 4.3% pace in the fourth quarter, according to a Reuters survey of economists.

That would be the second-fastest growth pace since the third quarter of 2003. Strong consumer spending and business investment as well as the housing market are expected to boost growth.

The rise in COVID-19 vaccinations and the White House’s $1.9 trillion pandemic rescue package have allowed for greater economic re-engagement, boosting consumer spending, hiring and business spending on equipment.

Some of the goods imported in March ended up in warehouses at wholesalers, which could blunt the drag on GDP growth from trade. The Commerce Department reported wholesale inventories shot up 1.4% last month after rising 0.9% in February.

But stocks at retailers tumbled 1.4% after gaining 0.1% in February. Retail inventories excluding autos, which go into the calculation of GDP, rose 0.6% after advancing 1.4% in February.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

U.S. manufacturing near two-year high; road ahead difficult

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing activity accelerated more than expected in October, with new orders jumping to their highest level in nearly 17 years amid a shift in spending toward goods like motor vehicles and food as the COVID-19 pandemic drags on.

The survey on Monday from the Institute for Supply Management (ISM) was the last piece of major economic data before Tuesday’s bitterly contested presidential election. But the outlook for manufacturing is challenging.

While the coronavirus crisis has boosted demand for goods complementing the pandemic life, a resurgence in new cases across the country could lead to authorities re-imposing restrictions to slow the spread of the respiratory illness as winter approaches, which could crimp activity. Government money for businesses and workers hit by the pandemic, which boosted economic growth in the third quarter, has dried up.

“Manufacturing rebounded strongly with fewer restrictions on economic activity and stimulus efforts, but the path forward will be more difficult as the economy continues to cope with the pandemic,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

The ISM said its index of national factory activity increased to a reading of 59.3 last month. That was the highest since November 2018 and followed a reading of 55.4 in September.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.3% of the U.S. economy. Economists polled by Reuters had forecast the index rising to 55.8 in October.

The jump in activity, however, likely overstates the health of the manufacturing sector. A report from the Federal Reserve last month showed output at factories dropping 0.3% in September and remaining 6.4% below its pre-pandemic level.

Manufacturers and suppliers said last month they “continue to operate in reconfigured factories” and with every month were “becoming more proficient at expanding output.”

Though sentiment among manufacturers remained upbeat, there were two positive comments for every cautious comment, a slight decrease compared to September.

The outcome of Tuesday’s vote is expected to lead to a brief period of uncertainty. President Donald Trump is trailing former Vice President and Democratic Party candidate, Joe Biden, in national opinion polls.

Stocks on Wall Street were trading higher following their steepest weekly loss. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

NEW ORDERS SURGE

Fifteen industries, including apparel, food, furniture and transportation equipment reported growth last month. Textile mills and printing reported a contraction.

Manufacturing’s continued recovery will likely keep the economy floating, with growth expected to slow sharply in the fourth quarter after a historic 33.1% annualized rate of expansion in the July-September period.

Growth last quarter, which followed a record 31.4% pace of contraction in the April-June quarter, was juiced up by more than $3 trillion in government pandemic relief. There is no deal in sight for another round of fiscal stimulus.

A separate report from the Commerce Department on Monday showed construction spending rose a moderate 0.3% in September, slowing after a 0.8% increase in August.

The coronavirus crisis has pulled spending away from services towards goods that complement the changed life-style. Spending on goods has surpassed its pre-pandemic level.

Makers of chemical products reported “business continues to be robust.” Food manufacturers said they had “increased production due to stores stocking up for the second wave of COVID-19.” Manufacturers of computer and electronic products said the coronavirus continued “to have an effect on supplier support and operations, more from a decreased labor perspective rather than unavailable material.”

The ISM’s forward-looking new orders sub-index surged to a reading of 67.9 last month, the highest reading since January 2004, from 60.2 in September. Customers’ inventories remained too low for the 49th straight month and order backlogs steadily increased, which bodes well for future production.

“On the upside, social distancing efforts, which have been a factor in consumers pivoting spending away from services and toward goods, is showing no signs of abating, especially as virus case counts are surging again,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

“This shift to goods spending should continue to underpin orders, but is unlikely to go on with the same muster as it did earlier when an initial flurry of spending on manufactured goods aimed at setting up at-home offices and remote classrooms boosted goods spending.”

With orders booming, manufacturing employment expanded for the first time since July 2019. The ISM’s manufacturing employment gauge rose to a reading of 53.2 from 49.6 in September. That likely supported overall job growth in October.

According to a Reuters survey of economists, nonfarm payrolls probably increased by 700,000 jobs last month after rising 661,000 in September. Employment growth has cooled from a record 4.781 million in June. About 11.5 million of the 22.2 million jobs lost during the pandemic have been recovered.

The government is scheduled to publish October’s employment report on Friday.

(Reporting By Lucia Mutikani,; Editing by Chizu Nomiyama and Andrea Ricci)