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The Line: Retail Sales Rise More Than Expected in October

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

Retail sales rose by 1.3% last month—better than the 1.0% growth economists were expecting. Compared to a year ago, retail sales are up 8.3%.

I know I called for a one-month moratorium on using the "R" word two weeks ago, but this report on consumer spending is just more proof that the economy is not in recession. The 1.3% monthly gain is the highest since February, and nine of the 13 categories in the report posted increases from the prior month. The biggest rise in sales last month were at gasoline stations (+4.1%), and restaurants and bars (+1.6%).

When looking at retail sales, it’s important to remember that this data is not adjusted for inflation. So, while spending rose 1.3% in October, almost one-third of that gain is due to rising prices. Inflation had an even greater impact on the 8.3% annual increase in retail sales, as prices jumped 7.7% during that same period. So, consumers continue to spend more, but they are getting less for their money. How do they keep spending when prices are rising faster than their incomes? See the section below for the answer to that question.

That said, this still should be viewed as good news. We fully expect economic growth to continue to slow as the Fed keeps hiking rates, but at least for now, we are avoiding the dreaded "R" word.

Household Debt Rising at its Fastest Pace in 15 Years

The Federal Reserve reported last Tuesday that household debt rose by $351 billion in 3Q22, the largest quarterly increase since 2007. Over the past year, household debt has increased by $1.27 trillion. Americans now owe a record $16.5 trillion, or about half of the national debt. Nice to know that citizens are slightly more responsible than our elected officials when it comes to borrowing money. Although at the end of the day, Americans are on the hook for both debts, which total almost $48 trillion. Ouch. What were the biggest contributors to this surge in borrowing last quarter? Mortgage debt rose by $282 billion, while credit card balances climbed $38 billion. Over the past 12 months, credit card debt has jumped more than 15%, its highest annual increase in over 20 years. So, we see now that consumers are keeping up their spending by using their credit cards at an increasing pace. This is especially concerning given how much interest rates on credit cards have risen. The only question left is: How much longer can consumers afford to do this?

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