US shoppers spent more at retailers last month in latest sign consumers are driving growth

WASHINGTON (AP) — Americans stepped up their purchases at retailers last month as low unemployment, steady pay gains and rising stock and home values helped sustain their willingness to spend despite higher prices.

Retail sales rose 0.4% from August to September, the Commerce Department said Thursday, up from 0.1% the previous month and the third straight increase. Online retailers, restaurants, and grocery stores all reported higher sales.

Sales at gas stations fell, because of lower pump prices. The retail sales figures aren't adjusted for inflation, and the prices of goods fell slightly last month.

With the presidential election in its final weeks, Thursday's figures provided the latest sign that household spending is fueling a steady economic expansion even while inflation has cooled. In his campaign for the White House, Donald Trump has insisted that sweeping new tariffs on all imports and lower corporate taxes are needed to deliver healthy growth. Vice President Kamala Harris has countered with proposals for expanding tax credits for families with children and subsidizing home construction to try to lower housing costs.

"Retail sales came in well above expectations and continue to defy the 'weak economy' thesis," said Quincy Krosby, chief global strategist for LPL Financial, a wealth management firm.

Restaurant sales jumped 1% from August to September, a sign that many Americans remain confident enough in their finances to boost their discretionary spending. Rising sales at sporting goods outlets point in the same direction.

Clothing store purchases leapt 1.5% last month, though sales at electronics and furniture stores dropped.

Last week, the government reported that consumer prices rose just 2.4% in September from a year earlier, down from a peak inflation rate of 9.1% in June 2022 and barely above the Federal Reserve's 2% target. With prices coming under control, the Fed cut its benchmark interest rate last month for the first time in four years by a larger-than-usual half-point. By year's end, economists expect two additional Fed rate cuts, of smaller quarter-point increments, which should help ease borrowing costs over time.

Yet the healthy pace of retail sales could strengthen the hand of Fed officials who have expressed a more cautious approach to rate cuts. Last month's half-point rate cut had coincided with worries that the job market might be rapidly weakening. But then the jobs report for September showed that hiring picked up last month, and the unemployment rate fell to a low 4.1%.

Many analysts say they think cooler inflation and lower borrowing rates will help support the economy in the coming months. Last quarter, the economy grew at a solid 3% annual rate.

Still, research by the Fed has found that it's mostly upper- and middle-income Americans who are driving the increased retail spending by consumers. Many lower-income households, by contrast, have struggled to keep up with sharply higher prices and interest rates, and have increased their spending by much less.

The lagging outcome for lower-income consumers marks a shift from before the pandemic, according to a research note by Sinem Hacioglu Hoke, a Fed economist, and two colleagues. Before the pandemic, they found, retail spending rose for all income groups at roughly the same pace. But about three years ago, upper- and middle-income consumers started to spend at much faster pace than lower-earning consumers.

By August 2024, spending on retail goods was nearly 17% higher than it was in January 2018 for upper-income households, defined as those making more than $100,000. For middle-income households — those earning $60,000 to $100,000 — their spending rose 13.3% during the same period. And for those earning less than $60,000, spending has risen just 7.9% since 2018, and it actually fell from mid-2021 through mid-2023.

Thursday's retail sales report arrives amid expectations for a solid holiday shopping season, though perhaps not as robust as last year's, with many shoppers under pressure from higher prices despite the easing of inflation. The National Retail Federation has predicted that shoppers will increase their spending in November and December by between 2.5% and 3.5% over the same period a year ago. During the 2023 holiday shopping season, spending had surged by a stronger 3.9% from 2022.

To try to pull in shoppers, many retailers, from the holiday décor online retailer Balsam Hill to the crafts retailer Michaels, are displaying holiday merchandise and marketing earlier than they did a year ago. For the first time, Balsam Hill transformed what is traditionally its fall catalog, sent in September, into a holiday book.

The company's chief executive, Mac Harman, said its sales of holiday decor spiked in mid-September, a month earlier than it had a year ago. Harman said he also noticed that Halloween decor sold briskly in September, also a month earlier than in 2023.

Michaels, based in Irving, Texas, said it was setting up its holiday decor shop called Sprinkle Shop now, nearly a month earlier. It is also displaying its do-it-yourself offerings three weeks earlier than usual because some of its customers appear to want to save money by making their own gifts.