Americans Spend at Restaurants, Bars Even as Prices Rise

Americans are still spending, despite the elevated cost of borrowing and high prices, as U.S. retail and food services sales were above what analysts expected in September, hitting nearly $705 billion, U.S. Census Bureau data showed on Tuesday, illustrating a resilience that continues to surprise economists.

The rise of retail sales, by 0.7 percent last month from August, beat the 0.3 percent rise that economists had expected, according to a Reuters poll.

Food services and drinking places saw sales go up 9.2 percent from September 2022, the Census Bureau said.

Analysts suggested that slowing consumption at the end of the third quarter may have indicated a similar decline in retail sales, according to Oxford Economics. But there was strength towards the end of the quarter that appears to have lifted up spending.

The jump in retail sales ahead of the Federal Reserve meeting at the end of October complicates their decision further on whether to hike rates in their battle against high inflation. Policymakers have been raising rates since March 2022 to slow the economy with the expectation that the rise in borrowing costs would discourage more spending and eventually reduce price rises.

But American consumers, at least on the evidence of the September retail sales data, seem to still be OK with spending, a trend that surprised economists.

"We are seeing that consumers spent more than we initially thought over the course of the summer," Gregory Daco, EY's chief economist, told Bloomberg. "We've been surprised as to how resilient consumers are."

Consumers Spend Even As They Feel Sour About the Economy

Sales at gas stations saw a jump of 0.9 percent, so did spending at auto and parts dealers which registered an increase of 1 percent for the month. Nonstop retailers, which includes online stores, saw sales accelerate by a percent.

Consumers are still spending overcoming a rise in prices, which stayed high in September, and borrowing costs continue to stay elevated on the back of the Fed's aggressive hikes of rates that has hit a two-decade high making loans for home, for example, the most expensive they have been in two decades.

"While mounting headwinds to consumer incomes mean we expect spending growth to slow in the months ahead, the risks that spending contracts outright are fading," Michael Pierce, the lead U.S. economist at Oxford Economics, said in a note shared with Newsweek.

The way Americans are still willing to part with their cash seems to contradict their negative outlook about the state of the economy over the coming year. Last week, a survey showed that consumers feel that inflation will stay higher for longer hurting their personal finances amid a deteriorating business environment.

For the Fed, the question is what does the spending in September portend for the economy going forward, Daco said.

"Do we see that momentum persist into the fourth quarter or do we see a little bit of a pullback after the strong summer," he said.

The September sales still reflect strong growth over the summer and may not add to inflationary pressures going forward as the rise in prices and high rates are affecting consumers amid a resumption of student loan payments and childcare spending.

"We are seeing a drag on high prices, weighing on consumers' ability to spend as we move forward, especially for lower-income families. We are seeing the weight of higher interest rates weighing on people's ability and desire to spend on credit," Daco said.

For now businesses are not retrenching, supporting income and thereby allowing people to spend.

The strength in spending at the end of the third quarter showing a resilience that bodes well for the economy heading into the end of the year.

"The risks to our forecast for a slight contraction in consumption in [the fourth quarter] are firmly to the upside," Pierce said. "The strength of the economy also means that Fed officials will leave the door open for additional rate hikes."

Update 10/17/23, 10:45 a.m. ET: This story has been updated to add quotes, background and context.