ARLINGTON, Va. -- Though retail sales are slowing with the economy, NAFCU noted that consumer spending has stayed "relatively strong."

"The spending outlook for the holiday season appears to be solid, supported by lower energy prices and a healthy labor market. However, the softening of the housing market will continue to weigh on consumer spending well into next year," according to NAFCU Senior Economist Jeff Taylor.

NAFCU is forecasting that consumer spending will be approximately 3.0% in the fourth quarter and real GDP growth at about 2.5%, which should continue into 2007.

"Retail sales were stronger than the overall data suggest," Taylor said. Part of the 0.2% decline recorded in October was due to falling gas prices. Core retail sales, which exclude light vehicles and gasoline, increased 0.3% for the second consecutive month. Overall retail sales were up 4.5% percent year-over-year and core retail sales increased 5.4%.

He also observed that the consumer price index fell 0.5% for the second month in a row. Taylor credited the plummet in energy prices for a year-over-year decline of 1.3% during October. The core CPI was up 0.1% in October, but was down to 2.7% from 2.9% the previous month.

Still, core inflation remains well above the Federal Open Market Committee's target range of 2.0% to 2.3%. Though core inflation grew less than anticipated, the forecast calls for a continued increase through the end of the year. "Unless there is a clear downward trend in core CPI, the FOMC's concerns about inflation will not dissipate. Another 25 basis point increase in the Fed Funds rate is still possible over the near-term if core inflation continues to remain well above the FOMC's comfort zone," Taylor stated.