Apparently consumers are still willing to open their wallets, despite the fact so many are out of work. Retail sales in October rose 1.4%, outstripping the 0.9% increase economists had expected.

The retail-sales report reflects federal-government estimates of all receipts from retailers that sell durable goods (think cars, furniture, washer and dryers) and nondurable goods (your food, gasoline, party supplies, gardening materials). Today's U.S. Census Bureau report showed a surprising jump in auto sales last month, despite the expiration of the federal government's "Cash for Clunkers" stimulus program. Even more encouraging, if you exclude cars, retail sales were up 0.2% in October, rising for the third consecutive month.

Why do retails sales matter? Well, investors keep close tabs on retail sales because they have an immediate impact on stock prices. As I've noted in other blog posts, consumer spending makes up about 70% of the U.S. gross domestic product (GDP) -- the broadest measure of America's economy. Since consumer spending plays such a large role in GDP, retail-sales data help investors determine whether the economy is slowing down or picking up.

Rising retail sales also means retailers and goods manufacturers will generate higher profits, which translates to higher stock prices. On the other hand, declining sales suggest that consumers are reluctant to spend due to worries about their finances, and so companies that make and sell goods suffer (as do their stock prices).

Bond investors scour retail-sales reports even more keenly. Strong retail sales point to a pickup in the economy, which could lead to inflation. (Inflation erodes the value of fixed-income investments such as bonds.) Signs of a weakening economy, meanwhile, prompt many investors to sell stocks and invest instead in the relative safety of bonds.
But it's not just investors who are affected by changes in consumer spending. Rising retail sales creates jobs. When consumer spending is strong, retailers need to hire more salespeople and warehouse workers to keep up with demand. Strong retail sales also means retailers need to restock their shelves more often, driving up orders for new goods. Manufacturers then must hire more assembly-line workers -- though unfortunately for the U.S. labor market, much of that hiring takes place overseas.

So what does Monday's retail-sales report say about the direction of the U.S. economy? Not much.

Retail sales are up from earlier in the year, but much of that shopping has been spurred by federal stimulus programs, such as Cash for Clunkers, the home-buyer tax credit and the federal extension of unemployment benefits. Look no further for the influence of stimulus programs than at September retail sales, which were hit hard by the end of "Cash for Clunkers." Retail sales in September were revised sharply lower to show overall sales down 2.3%, compared with the 1.5% decline originally reported. And even October's 0.2% increase in retail sales excluding autos was less robust than the 0.4% increase economists had expected.

Still, consumers continue to shop despite rising unemployment, raising hopes that the traditional U.S. holiday-shopping season this year will be less dismal than some have predicted. The National Retail Federation, a trade group, expects overall holiday retail sales this year will be down 1% from a year ago, though research firm Forrester Research Inc. is predicting Internet holiday sales will increase 8% this season as cash-strapped shoppers go bargain-hunting online.

What say you, readers? Are you planning on cutting back on holiday purchases this season due to the economy? Do you plan on comparison-shopping online this season to get the best deals, or will you wait until the last minute to hit the brick-and-mortar stores for bargains?

Terri Cullen is an award-winning financial journalist. She was one of the original team of editors who helped to launch The Wall Street Journal Online. Terri is also the author of "The Wall Street Journal. Complete Identity Theft Guidebook." Read her bio to learn more about her.

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