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U.S. Economy Flashes Vivid Contradictions With Housing, Retail

U.S. Economy Flashes Vivid Contradictions With Housing, Retail

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Housing data out Wednesday reinforced a recent upswing in the industry, but when combined with a surprising decline in retail sales, the reports underscored how difficult it is to predict where the economy is headed.

Consumers are at the heart of both figures and Americans’ spending currently holds outsize importance for U.S. economic growth. It’s been a consistent bright spot even as trade-policy uncertainty has led to weakness in manufacturing jobs and business investment.

“Looking at Q3, retail sales look fine -- adding to growth -- but looking at Q4 and beyond, I think the picture is weaker,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Spending for the last couple of quarters has been running faster than income growth, and I think a correction is coming.”

U.S. retail sales posted the first decline in seven months, falling 0.3% in September as a setback in auto sales depressed the headline number. Even though the number missed all estimates, economists caution against putting too much stock in one report because the monthly figures are frequently revised. Additionally, the pullback in auto sales subtracted about 0.2 percentage points from the headline number, Shepherdson said, likely overstating the downbeat report.

U.S. Economy Flashes Vivid Contradictions With Housing, Retail

Despite those caveats, the report on retail sales helped strengthen bets that the Fed will cut interest rates again when policy makers meet Oct. 29-30 in Washington. But it’s not a sure thing, as the central bank also watches the mix of data coming from different areas of the economy.

Compared with the downbeat retail report, new data showing homebuilder sentiment rising suggests Americans continue to buy homes -- and builders expect demand to strengthen in the coming months.

The National Association of Home Builders/Wells Fargo Housing Market Index rose to 71 in October, the highest level since February 2018 and the fourth straight advance. Housing has also benefited from sustained wage gains. Sales are running at the fastest pace since early 2018 and groundbreakings are at a 12-year high.

U.S. Economy Flashes Vivid Contradictions With Housing, Retail

“The October spike in NAHB corroborates with other housing statistics that indicate low mortgage rates have finally been filtering into housing activity,” said Yelena Shulyatyeva, senior U.S. economist at Bloomberg Economics. “However, we estimate the positive impact will be limited due to heightened economic uncertainty.”

While the housing sector shows positive signs for the economy, it makes up only a small part of U.S. gross domestic product. A slowdown in consumer spending, which accounts for nearly 70% of growth, has greater implications for sustaining the nation’s longest economic expansion, now going for more than a decade.

Sentiment measures in October suggest the September dip in spending may pick up next month. But for now, and interpreting what Wednesday’s retail data mean for the economic outlook, Shepherdson says tread “carefully.”

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Margaret Collins, Vince Golle

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