By Lucia Mutikani
WASHINGTON (Reuters) -U.S. retail sales increased more than expected in November as households stepped up purchases of motor vehicles and online merchandise, consistent with strong underlying momentum in the economy as the year winds down.
The report from the Commerce Department on Tuesday had no impact on expectations that the Federal Reserve would cut interest rates on Wednesday for the third time since the U.S. central bank initiated its policy easing cycle in September.
Fed officials started a two-day policy meeting on Tuesday. Signs of strong domestic demand added to warmer inflation readings in recent months in suggesting that the Fed could pause rate cuts in January.
Policies planned by President-elect Donald Trump's incoming administration, including tariffs on imports and mass deportations of undocumented immigrants, are also seen complicating matters for the central bank.
"The market is still discounting a 25-basis-points rate cut tomorrow, but if consumers are still buying interest-sensitive goods like autos, a rational markets observer would have to wonder why would a central bank add fuel to the fire with a president-elect coming in at the end of January with one of the most pro-growth agendas of any president in history," said Christopher Rupkey, chief economist at FWDBONDS.
Retail sales jumped 0.7% last month after an upwardly revised 0.5% gain in October, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.5%. Estimates ranged from a 0.1% dip to a 1.0% surge.
Retail sales increased 3.8% year-on-year in November.
Labor market resilience, characterized by historically low layoffs and strong wage growth, is underpinning consumer spending.
Strong household balance sheets, reflecting record stock market prices and high home prices, are also driving spending.
Household savings remain supportive.
Economists expect policymakers will signal fewer rate cuts in 2025 when they update their summary of economic projections on Wednesday. The Fed's benchmark overnight interest rate is currently in the 4.50%-4.75% range, having been hiked by 5.25 percentage points between March 2022 and July 2023.
"Unless the labor market materially weakens, investors should expect the Fed to ease rates next year but not as much as originally hoped," said Jeffrey Roach, chief economist at LPL Financial.
Stocks on Wall Street traded lower. The dollar was steady against a basket of currencies. U.S. Treasury yields ticked up.
TARIFFS FEARED
The solid increase in retail sales came despite a late Thanksgiving holiday that pushed Cyber Monday into December, and was consistent with a strong start to the holiday shopping season. Sales at auto dealerships jumped 2.6%, likely boosted by residents replacing motor vehicles damaged by Hurricanes Helene and Milton. Online retail sales vaulted 1.8%, probably reflecting early holiday promotions.
Receipts at sporting goods, hobby, musical instrument and book stores increased 0.9%. Building material and garden equipment store sales rose 0.4%, likely as residents rebuilt in areas devastated by Helene and Milton.
There were also decent gains in sales at electronics and appliance stores as well as furniture outlets.
But there were pockets of weakness and hints of belt tightening among some consumers, especially low-income households.
Though layoffs remain low, hiring has cooled down. Consumer debt loads are expanding.
Receipts at food services and drinking places, the only services component in the report, fell 0.4% after increasing 0.9% in October. Economists view dining out as a key indicator of household finances.
Sales at clothing stores decreased 0.2%. Grocery store sales also declined 0.2%. Sales at miscellaneous retailers, which include florists and gift shops, dropped 3.5%, extending the prior month's decline.
Nonetheless, consumers generally remain in good shape.
Retail sales excluding automobiles, gasoline, building materials and food services rose 0.4% last month after a 0.1% dip in October.
These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They rose 0.3% after adjusting for inflation. Growth in core retail sales averaged a 6.5% annualized rate in the last three months. Economists estimated that consumer spending was running at around a 3.0% pace so far in the fourth quarter.
Consumer spending grew at a 3.5% rate in the third quarter, accounting for most of the economy's 2.8% pace of expansion during that period. The Atlanta Fed is forecasting GDP increasing at a 3.1% pace in the fourth quarter.
"We expect households to keep spending into the new year, but for the pace of consumption to slow as the year progresses and tariff-related price pressure bites," said Shannon Grein, an economist at Wells Fargo. "While the broad household sector is still in a decent financial position today, data suggest consumers are growing more vulnerable amid slowing real income growth and still-high financing costs."
While consumers continue to carry the economy on their shoulders, manufacturing remains downbeat in part because of the lingering effects of the Fed's policy tightening and crippling strike by factory workers at Boeing.
Factory output increased 0.2% in November after a downwardly revised 0.7% decline in October, the Fed said. Economists had forecast production rebounding 0.5% after a previously reported 0.5% decrease.
Though the Boeing strike ended in early November, production of aerospace and miscellaneous transportation equipment fell 2.6%. That was attributed to declines in the manufacturing of aircraft parts, and followed a 6.7% tumble in October. It partially offset a 3.5% jump in motor vehicle and parts output.
Tariffs loom over the sector next year.
"The threat of tariffs on imported raw materials and intermediate goods likely will stimulate manufacturing output briefly, as firms seek to increase inventory and control costs," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
"Nonetheless ... we think that heightened uncertainty over tariff and immigration policy will dissuade manufacturers from investing in additional capacity until the policy picture is clearer."