Shoppers: Finishing 2004 with a Flourish

November retail sales were surprisingly strong, and October's data were bumped up, too. This points to a robust holiday buying season

By Michael Englund and Rick MacDonald

In the aftermath of a contentious Presidential election, the U.S. consumer showed surprising resilience in November, as indicated by the retail-sales report for the month, released Dec. 13. Overall retail sales climbed 0.1% -- better than the median forecast of a 0.1% drop from a survey of economists by Action Economics. And sales excluding automobiles rose 0.5%, again topping the median forecast of a 0.3% gain.

The retail-sales data revealed upside surprises for the previous month as well -- October's headline figure was bumped higher to a 0.8% rise, from the previously reported 0.2% increase. The ex-auto figure for the month was raised to a 1.1% gain, from the prior reading of a 0.9% advance.


  The respectable retail-sales increases in November, combined with the hefty (and upwardly revised) gains over the prior two months, leave a robust consumption trajectory for the fourth quarter. The data support our call for a solid holiday sales season, as well as healthy growth for real consumption of near 4% in the fourth quarter.

How will the November sales figures be received by the Federal Reserve? Among the last economic reports ahead of the Dec. 14 rate-setting meeting of the Federal Open Market Committee, the data appear sufficiently firm to keep the central bank on track with a tightening, though the statement language should retain a familiar ring. Unless inflation flares up next year, we suspect the Fed will stay on course, hiking rates by a quarter-point at each of its upcoming policy meetings.

Looking at the November report's components, strength in electronics (+1%), building materials (+1.1%), and nonstore retailers (+1%) led the advance. Sales on the month were held back by declines in motor vehicles (-1.3%), sporting goods (-1.2%), department stores (-0.1%), and clothing (-0.1%). Surprisingly, the gasoline component increased 1%, despite the sharp drop in pump prices on the month.


  The report made clear that fourth-quarter sales will be robust. They're poised for firm growth of 7% in the quarter, with an even more potent 10% expansion in the areas excluding automobiles. This should translate to inflation-adjusted fourth-quarter consumption growth of around 4%, pointing to strength for the holiday shopping season.

We continue to expect a fourth-quarter gain in gross domestic product of around 5%, with solid sales growth in every major GDP component. This reflects an enthusiastic consumer and aggressive business spending, plus a positive economic response to falling energy prices, rising stock prices, and the end of the bitterly contested Presidential campaign.

Englund is chief economist and MacDonald is global director of investment research and analysis for Action Economics

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