October retail sales outstanding, consumer spending continues to improve

Shoppers carry bags outside Macy's department store in New York City.
Mario Tama | Getty Images

October retail sales were outstanding, up 0.8 percent compared to September but up 4.3 percent from a year ago. September was revised upward as well.

That goes right into GDP calculations. This morning Goldman raised their third quarter and fourth quarter GDP estimates to 3.2 percent and 2.6 percent respectively. Barclays also increased their fourth quarter GDP estimate to 2.7 percent from 2.5 percent.

Internet, health & personal care, home improvement, auto sales, and restaurant & bars all continued to see strong sales:

October Retail Sales

Nonstore (internet) up 12.9%
Health/personal care up 8.3%
Home improvement up 6.5%
Auto dealers up 5.8%
Restaurants/bars up 4.3%

It wasn't a perfect report. Department stores continued their downward descent, with sales down 7.3 percent.

And consumer electronics sales continue to decline, down 4 percent, due to deflation (those flat screen TVs keep going down in price—great for consumers!) and a dearth of exciting new products.

Here's the problem: Retail stocks (XRT) are up 7 percent since the election. Kohl's, Nordstrom, and JC Penney are up double-digits. Why?

Reported earnings so far are OK, but not amazing. True, Home Depot and TJX both reported strong results (Lowe's reports Wednesday). Some of the department stores—Macy's and Kohl's—had positive comments on sales trends last week. Inventories have stabilized.

But double-digit gains in some department stories in the past week? The fundamentals haven't changed that much! Retail earnings in the third and fourth quarter will be "better but still sluggish," Ken Perkins at RetailMetrics said.

This is the Trump effect again: a vague hope for more wage growth, more tax cuts.

Like the big runup for banks based on less regulation and higher rates, this is a long-term bet that may or may not pan out.

Take the idea that tax cuts will put more money in the pockets of consumers. Maybe, but even then it's not clear how that will pan out. This morning Evercore ISI looked at the Bush tax cuts of 2001, which took marginal rates down to a range of 10 percent to 35 percent from 15 percent to 39.6 percent. Did it make a difference in spending? Evercore found it had "had no impact when first passed in 2001, perhaps because they were phased in over 5 years (ending 2006)."

However, in May 2003, the cuts were accelerated to that year and retail sales accelerated from 3 percent to over 5 percent the next few years.

Bottom line: betting on retailers expanding earnings based on tax cuts is a tough call. It depends on how big the cuts are, and when they are implemented.

And the bet on higher wages and higher interest rates has a down side as well. Home Depot is lower, despite excellent earnings, on concerns higher rates may deter home buyers. And TJX were down after they noted that earnings growth may be held back by—gasp!—wage increases and the strength of the dollar.