Could US retail sales continue to rise despite fundamentals?

Retail Sales rose in October by 1.3% above the 1% of market consensus. Analysts point out that despite the apparent endurance, consumers are struggling to keep up the pace. They warn that the last time credit card borrowing was growing like it is now, the US was heading into the 2008-2009 recession.

The fundamentals are not supportive for consumer spending, yet retail sales continues to forge ahead. While it is certainly true that this is a nominal measure, even after adjusting for inflation, consumers are spending more.

It is tempting to cheer on the “resilience” of the consumer, but the staying power of spending gives businesses no incentive to forgo price increases, thereby making the task of getting inflation in check more difficult for policymakers.

Even with continued consumer resilience, some cracks are slowing forming in the foundation. Households have increasingly relied on credit to spend and increased overall debt $351 billion in the third quarter, putting the total debt burden for households at $16.5 trillion, according to data released yesterday by the NY Federal Reserve. That’s an increase of 8.3% from a year earlier, the biggest annual increase since a 9.1% jump in Q1-2008 at the start of the 2008-2009 recession.

Near-term consumer resilience will come at a further deterioration in household finances as households draw down savings and accumulate debt to spend. That may eventually spell economic trouble.