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Retail Sales Up: Is the Economy Ready for a Rate Hike?

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The Federal Reserve may have just obtained another solid reason to reach a consensus over when to go for a rate hike when it meets next in November, ahead of the Presidential election. U.S. retail sales rebounded sharply in September – after a pullback in the month of August – buoyed by sturdy auto sales and rising gasoline prices, clearly indicating that the economy is gathering pace and setting the stage right for an upbeat holiday season.

The Commerce Department unveiled that sales at retail stores, restaurants and online grew 0.6% to a seasonally adjusted $459.8 billion last month − a sheer reflection of an improving job scenario and steady increase in income that are encouraging consumers to spend more. We note that September retail sales improved from a 0.2% drop witnessed in August, which was revised upward from the initial reading of a 0.3% decline.

Is Economy on Track for a Rate Hike?

A slew of economic data suggests that the environment is much conducive now and the Fed officials may have little difficulty in arriving at a decision. However, inflation, which is still below the 2% target, might prove to be a hurdle. Post Brexit, the U.S. economy looks much steady. A clear answer to this was the GDP growth of 1.4% in the second quarter of 2016, far better than a 0.8% increase recorded in the first quarter.

Another factor that makes the case strong for an increase in the rate is the rise in consumer confidence. According to the recent Conference Board data, the Consumer Confidence Index increased to 104.1 in September from the August reading of 101.8, and is at its highest level since Aug 2007. However, we can’t ignore the outcome of the election that may have an impact on consumers’ sentiment.

Per the Labor Department, the economy added 156,000 jobs in September. Although not spectacular, this points to growth. Given an improving labor market and the gradual rise in wages, we expect consumer spending to improve. Consumer spending increased 4.3% in the second quarter.

The optimism over the health of the economy gets a further boost from the recent U.S. factory activity data and service-sector index. The Institute for Supply Management (ISM) stated that the index of national factory rose to 51.5 in September from 49.4 in August, whereas non-manufacturing index increased to 57.1 in September from 51.4 in August.

What Will the Fed’s Move Be?

Of course, the economy is not in bad shape. The reasons for the liftoff are on the table and Janet Yellen may have no problem in imposing it. The widely accepted speculation is that the Federal Reserve may raise its benchmark interest rate in December –  if not in November, chances of which are slim – only after due consideration of the global as well as domestic economic climate.

Last year in December, the Federal Reserve raised interest rates for the first time in almost a decade to a range of 0.25%−0.50%, and currently the market is bracing for another quarter-point increase. Industry analysts predict that encouraging economic data might reflect in an interest rate hike – a step toward “normalizing monetary policy”.

The Final Verdict

Though the economy might be dealing with various micro and macro issues, an increase in retail sales definitely holds good for both brick & mortar and online retailers, which are bracing up for the busiest part of the year. With the advent of the holiday season, the retail sector will hog all the attention. So, it will be prudent to shift your focus to retail stocks that still hold promise. These stocks – Urban Outfitters Inc. (URBN - Free Report) ,, Inc. (AMZN - Free Report) , Big 5 Sporting Goods Corp. (BGFV - Free Report) , The Children's Place, Inc. (PLCE - Free Report) and Tilly's, Inc. (TLYS - Free Report) − are backed by a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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