Retail Sales Increase ‘Well Above’ Market Expectations

Retail sales rose by 1.3% in October, well above market consensus for a 0.9% increase. Core (control) retail sales, which excludes volatile retail sub-sectors such as sales at gasoline stations and food service establishments, rose by a strong 0.7%, more than double market expectations. Retail sales rose broadly with 9 of the 13 retail sales components increasing last month. 

The Producer Price Index (PPI) for final demand rose 0.2% in October and 8.0% in year-ago terms. Both were notably below market expectations for 0.5% monthly and 8.4% yearly increases. Underlying details of the PPI report were encouraging, too. Final demand goods prices rose 0.6% primarily due to higher energy prices. The less volatile sub-index for core PPI final demand goods excluding energy and food declined by 0.1%. Final demand for services also declined in October by 0.1%.

Import prices declined by 0.2% in October. Both fuel and non-fuel import prices continue to ease, with the strong dollar helping keep import inflation down. Export prices were down 0.3% from the previous month. Both import and export prices have declined for four consecutive months.

Consumers’ expectations for inflation in the year-ahead rose by 0.5% to 5.9% in the New York Fed’s monthly survey. Consumers’ short-term inflation expectations are heavily influenced by gasoline prices, so the increase isn’t a surprise. Three-year-ahead and five-year-ahead inflation expectations rose as well, each by 0.2% to 3.1% and 2.4%, respectively.

Industrial production declined 0.1% in October, below markets’ expectation for a flat reading. Mining fell 0.4% and utilities output fell 1.5%. Utilities output has been very weak in the past three months due to mild weather. Manufacturing rose 0.1% but was revised down in the previous two months. After revisions, capacity utilization eased to 79.9%, but was still above its long-term average of 79.6%.

Housing data continue to weaken. Starts sank by 4.2% in October to an annualized rate of 1.425 million.  Starts in October were 14.4% below January’s rate of 1.666 million. Building permits also fell notably, dropping 2.4% to an annual rate of 1.526 million. Permits in October were down 17.1% compared to January’s rate of 1.841 million.

Bill Adams is senior vice president and chief economist at Comerica. Waran Bhatruethan is vice president and senior ecomomist at Comerica.