Consumers went shopping in October and gave a much-needed boost to retailers, adding some crucial momentum to the holiday shopping season.
U.S. retail sales increased 0.3% last month, after dropping 0.3% in September, the Commerce Department said Friday. With the help of falling gasoline prices and increased consumer optimism, sales beat analyst expectations of a 0.2% increase.
"When October came in we know from the employment reports that incomes went up and confidence was doing relatively well," said Chris Christopher, an economist at IHS Global Insight. "So wham-o, you get a pretty strong October."
Signs that the economy was steadily perking up put shoppers in a spending mood, analysts said. The unemployment rate fell to a six-year low of 5.8% in October, and consumer confidence hit the highest level since 2007, according to the Thomson Reuters/University of Michigan index.
This holiday season should compare favorably to last year's, when the government shutdown paralyzed consumer confidence and harsh winter storms in many parts of the country prevented people from shopping, analysts said.
"Everything is in place for a relatively better holiday season," Christopher said.
He forecast that retail sales would clock in with a 4.2% increase this season, slightly higher than the estimated improvement of 4.1% by the National Retail Federation for November and December. The trade group said this year will be the first time since 2011 that holiday spending will increase more than 4%.
Retail sales are considered a bellwether of consumer spending, which makes up two-thirds of U.S. economic activity. Retailers can reap up to 40% of their annual revenue during the last few months of the year.
But some economists cautioned that lingering anxiety among Americans could make this holiday season a modest one.
Lindsey Piegza, chief economist at Sterne Agee, said several months of falling prices at the pump should have contributed to a higher jump in consumer spending. But many people are choosing instead to sock that money away in savings or use it to pay down debt.
"Anything less than a 1% increase [in sales] suggests the consumer is still on a very fragile footing," she said. "This more muted tone of spending highlights the concern that retailers have expressed as they are sitting on tremendous quantities of inventory" from earlier this year.
Retailers already are angling to woo shoppers with discounts and promotions that have started well before Black Friday, the traditional kickoff to the holiday shopping season. Many retailers such as Macy's and J.C. Penney have moved their Black Friday hours up even further into Thanksgiving Day.
Despite a slight pickup in wage growth — with average hourly earnings climbing 3 cents to $24.57 in October — earnings for many workers have remained stagnant, the Labor Department said this month. Wages were up about 2% in the 12 months ended in October, just barely beating the 1.7% inflation rate.
"We have been waiting for years for income growth," Piegza said.
Some analysts said customer traffic bounced back only slightly at shopping centers after a drop in September, a potential sign of trouble for the prime gift-shopping months of November and December.
"Traffic increased only marginally compared to last year, despite a much better macroeconomic environment than last October," according to a report from Euclid, which analyzes shopping patterns. "Repeat visits were down significantly."
Euclid said store traffic climbed 3% in October from the month before. But much of that increase was due to an easy comparison to last year, when spending dropped during the government shutdown.
Although falling gas prices put more money into consumer pockets, it also pushed down the overall retail sales totals, which include gas purchases.
Sales at service stations were down 1.5% in October from the previous month as the average nationwide cost of a gallon of regular gasoline fell below $3.
Retail sales were up 0.5% in October if gas purchases were taken out of the equation, said Chris Rupkey, chief financial economist at Union Bank.
Several sectors showed growth in August.
Sales at clothing and accessories stores posted a 0.5% rise. Furniture sales grew 0.2%, and building materials and supplies dealers reported a 0.4% increase. Stripping away motor vehicle and parts receipts, retail sales increased 0.3%.