October Retail Sales Fell Flat. Weak Car Sales Weighed On the Data.

Black Friday weekend was better than feared as people scoured both aisles and online stores for deals. (Brian Kaiser/Bloomberg)

Key Points

• Consumer spending was flat in October, with retail sales virtually unchanged from September, though sales rose 3.5% on an annual basis.
• Excluding gasoline, cars, and car parts, sales increased by 0.5%, with nonstore retail sales, a proxy for e-commerce, rising 1.8%.
• The Federal Reserve notes resilient consumer spending, but acknowledges a K-shaped economy where higher-income households drive much of the spending.

Consumer spending was flat in October as weaker car sales dragged down the headline number. Underlying trends in the data, however, suggest that while Americans are tightening their belts, overall demand remains resilient.

Retail sales were virtually unchanged in October from September, according to data released Tuesday by the Census Bureau. Economists polled by FactSet expected a 0.05% increase. Sales rose 3.5% on an annual basis.

September’s headline retail sales were revised lower to a 0.1% monthly increase from a 0.2% increase previously.

That weaker vehicle sales weighed on October’s figure—sales at car and parts dealers were down 1.6% from September—wasn’t a surprise. Many people rushed to buy a car earlier this year, fearing tariffs would push costs prohibitively higher later on.

Indeed, excluding sales of gasoline, cars, and car parts, sales rose 0.5%, slightly better than the 0.4% increase economists were forecasting. Eight of the 13 store categories the Census Bureau tracks notched monthly increases, led by a 1.9% increase in sales at stores selling sporting goods, hobby supplies, musical instruments, and books.

“While adjusted retail sales was flat month-over-month, there was still healthy growth in consumer spending relative to October last year and probably not a cause for concern given the strength in high frequency spending data tied to the holidays,” wrote Scott Helfstein, head of investment strategy at Global X.

Nonstore retail sales, a proxy for e-commerce, rose 1.8%. October sale events such as Amazon.com’s Prime Big Deal Days likely helped spur demand.

It is worth noting Census Bureau spending data isn’t adjusted for inflation. The recent uptick in prices tied to new tariffs means real, or inflation-adjusted, spending is much lower than the headline number.

The numbers released Tuesday are also dated. Federal agencies are recovering from the government shutdown in the fall, and the Census Bureau hasn’t set a date for the release of November spending data.

That said, the rise in e-commerce sales suggest that consumers responded well to online discounts. It is a positive indicator for the November sales report and total holiday spending.

Created with Highcharts 9.0.1Retail sales have had big swings month to month in the past couple of years. Source: Federal Reserve Bank of St. Louis

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Third-party data suggest consumption over the Black Friday weekend was better than feared as people scoured both aisles and online stores for deals. Mastercard estimates that, in total, online and in-person shopping on Black Friday rose 4.1% year over year.

Investors and economists keep a close eye on consumer spending because it is one of the biggest drivers of economic growth, and can “easily dictate the future direction of monetary policy,” wrote a team of Fundstrat researchers. If spending is too strong, the Federal Reserve may decide it doesn’t need to cut rates to prop up the economy. Weak spending could signal lower rates are needed to stimulate demand.

The Fed, however, has yet to sound the alarm on consumer health. Indeed, Chair Jerome Powell said last week that resilient consumer spending gave many members of the Federal Open Market Committee confidence to raise their economic growth forecasts for 2026.

Powell acknowledged, however, that the so-called K-shaped economy —a phrase that describes how higher-income households seem to be thriving, while lower and middle-income consumers are hurting —was “clearly a thing” that was affecting spending. Lower-income households seem to be buying less, while people at the higher end of the income spectrum are driving a good chunk of consumer spending, benefiting from higher housing prices and a run-up in equities.

“The desire to spend, particularly by more affluent customers, has outweighed consumer concerns about the economy, although the sustainability of this dynamic remains unknown,” wrote David Silverman, senior director at Fitch Ratings.

While Fitch isn’t expecting a consumer recession in the near term, the firm expects retail sales will continue to cool in the coming months, especially in discretionary categories.

Write to Sabrina Escobar at sabrina.escobar@barrons.com