Retail Sales Inch Ahead, Hinting at a Less-Than-Happy Holiday Shopping Season

By Jason Simpkins
Associate Editor

Retail sales expanded at only a moderate pace in October, and analysts are growing increasingly concerned that retailers are looking at a sub-par holiday season.

Total retail sales for the month increased 0.2%, which was in line with most estimates, but which represented a significant retreat from the upwardly revised 0.7% gain in September, according to figures released yesterday (Wednesday) by the U.S. Commerce Department.

The sales increase was boosted by a 0.8% gain in gas station sales, thanks chiefly by higher prices at the gas pump. Excluding gasoline, retail sales were only up 0.1%  - their smallest gain in four months.

"The consumer continues to shop, though most of the additional money is paying for the higher costs of gasoline and food," Joel Naroff, President and Chief Economist at Naroff Economic Advisors Inc., told Money Morning. "Rising food and energy costs led to significant increases in household spending that basically accounted for all of the gain."

Higher gasoline prices are the direct result of crude oil's surge towards $100 a barrel. The price of oil has climbed 30% in the last month - and has quadrupled since 2002.

With the U.S. housing market mired in a deep and painful slump, and stringent lending guidelines putting a crimp on borrowing consumer and commercial borrowing, the last thing the U.S. economy needs is the added burden of gasoline at more than $3 a gallon for a prolonged stretch. But to have those negative factors all come together at the start of the all-important holiday shopping season makes the nation's economic outlook even more dire.

Fourth-quarter retail sales can account for as much as 50% to 70% of a retailer's sales and profits for the year. So a consumer-spending slowdown at this point could be especially damning, of annual sales and profits. So a consumer backlash at this point would be particularly dramatic. A possible December rate cut by the Federal Reserve would come too late to save the holiday shopping season.

So far, Fed Chairman Ben. S. Bernanke has been walking a tightrope as he tries to balance the specter of rising inflation against the threat of an economic downturn. And there's no middle ground, for any steps taken toward solving one of the problems is almost certain to exacerbate the other one.

Since consumer spending accounts for 60% to 70% of U.S. economic growth, a downturn in spending could severely impact an economy already significantly scarred by the subprime mortgage meltdown.

The Fed has already reduced its benchmark rate by 75 basis points (three quarters of a percentage point) in the last three months, but the risk of inflation could prevent Bernanke & Co. from taking further action.

"Further sharp increases in crude prices have put a renewed upward pressure on inflation and may impose further restraint on economic activity," Bernanke said in testimony given before Congress Nov. 8.

The Producer Price Index (PPI), an indicator of wholesale prices being paid by businesses, was also released yesterday. It showed a modest 0.1% increase in wholesale prices for the month of October, which suggests only moderate inflation.

Food prices rose 1%. Energy prices fell 0.8% in October after jumping 4.1% in September.  The core PPI, which excludes food and energy prices, remained unchanged from a 0.1% gain in September. The Consumer Price Index (CPI), a slightly more accurate barometer of the inflationary climate, is set for release today (Thursday). It is expected to rise by 0.2%.

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