U.S. Economy: Retail Sales Increased 1.2% in October

Sales at U.S. retailers climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent.

Purchases rose 1.2 percent, exceeding the highest forecast among economists surveyed by Bloomberg News, according to data from the Commerce Department issued today in Washington. Another report showed manufacturing in the New York region unexpectedly shrank in November as orders dropped.

Stock gains over the past two months and growing employment are helping households repair finances, indicating consumer spending will play a bigger role in the recovery. At the same time, merchants from J.C. Penney Co. to Wal-Mart Stores Inc. are offering promotions to guard against any letdown in the last two months of the year, typically the biggest shopping season and hiring time for retailers.

“We expect the holiday shopping season to really ramp up in November,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who forecast a 1.1 percent gain in sales. “The breadth of discounting” and steady income gains are “providing some support,” he said.

The improvement in spending comes as other parts of the economy show signs of cooling.

Manufacturing in the New York region contracted in November for the first time in more than a year, according to the Federal Reserve Bank of New York’s so-called Empire State Index. The measure, which covers New York, northern New Jersey and southern Connecticut, fell to minus 11.1 from 15.7 in October. Readings less than zero signal declines in activity.

Shares Climb

The Standard & Poor’s 500 Index fell 0.1 percent to 1,197.75 at the 4 p.m. close in New York as increasing concern over Fed policy and the government budget deficit wiped out earlier gains. The S&P Consumer Discretionary Index, which includes auto dealers, hotels and restaurants where sales are more sensitive to the economic outlook, fell 0.3 percent after having been up as much as 0.7 percent.

The median estimate of 74 economists surveyed projected retail sales would increase 0.7 percent. Forecasts ranged from increases of 0.4 percent to 1.1 percent. The Commerce Department revised the September rise up to 0.7 percent from the 0.6 percent gain previously reported.

Nine of 13 categories in today’s report showed an increase in demand, led by a 5 percent gain among auto dealers. Vehicles sold at a 12.25 million seasonally adjusted annual rate last month, the strongest performance since the government’s cash- for-clunkers program in August 2009, according to industry data released earlier this month.

Effect on Growth

Sales excluding automobiles advanced 0.4 percent, matching the median forecast of economists surveyed.

Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, sales improved 0.2 percent after a 0.4 percent gain the prior month.

Non-store merchants, which include Internet retailers, sporting goods and building material stores, were among the other categories that showed increasing demand.

The National Retail Federation has forecast November-December holiday sales will rise by 2.3 percent from a year ago, the most since 2006.

J.C. Penney, the third-largest U.S. department-store company, last week said third-quarter profit rose 63 percent. Fourth-quarter sales at stores open at least a year will rise 3 to 4 percent, the Plano, Texas-based company said in a Nov. 12 statement, adding that the holiday shopping environment will “remain highly promotional.”

Rebuilding Inventories

Companies may be stocking up ahead of the holidays in anticipation of better sales, another report showed today. Inventories rose 0.9 percent in September, more than forecast, according to figures from the Commerce Department. Auto dealers and building material stores led the advance.

The pace of job growth and Americans’ drive to pay down debt and boost savings may remain hurdles for retailers. Payrolls grew by 151,000 workers in October, the first gain in five months, and the unemployment rate held at 9.6 percent, the Labor Department said Nov. 5.

Joblessness will average 9.3 percent in 2011, according to the median forecast of economists surveyed by Bloomberg this month.

Shares over the past two months rallied in anticipation of more action by the Fed to spur growth. Policy makers this month announced a plan to buy an additional $600 billion of Treasuries through June with the aim of reducing joblessness and averting a drop in prices that would hurt the recovery.

The government may also be poised to extend support for American households.

Tax-Cut Extension

President Barack Obama has said he’s committed to extending tax cuts for middle-class Americans that are due to expire by the end of the year and indicated he’s willing to negotiate with Republicans an extension for the country’s highest earners.

The Democratic Party this month lost control of the House of Representatives to Republicans amid voter discontent over the outlook for the economy.

“It is good to see consumer spending coming back,” Rebecca Blank, the Commerce Department’s undersecretary for economic affairs, said in an interview. “If middleclass Americans see their taxes increase, that is going to have a negative effect. I’m very hopeful that we are going to maintain the current tax setting.”

(Updates with closing market prices in seventh paragraph.)
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