U.S. Retail Sales Flag as Support from Tax Rebates Wane

Daily Forex Fundamentals | Written by RBC Financial Group | Sep 12 08 14:15 GMT |

Retail sales were much weaker than expected in August, dropping -0.3% compared to expectations of an increase of 0.2%. The growth rate was expected to stay in positive territory largely on the basis of earlier indications of a rebound in auto sales, which did, in fact, rise 1.9% in August. However, this was more than offset by the sizeable, and unexpected, drop of 0.7% in the ex auto component. The bad news contained in this morning's report was further exacerbated by the sizeable downward revision to growth in retail sales in July to a drop of 0.5% from the previously reported drop of 0.1%. However, the lion's share of the revision was concentrated in the motor vehicle component, with growth in sales excluding autos revised down only slightly to 0.3% from 0.4% previously. Some weakness in the ex auto component had been anticipated with falling gasoline prices expected to send service station receipts down in the month. The service station component was reported this morning to be down 2.5% in August. However, what was of greater downward surprise was the broad-based weakness in a number of other components, led by drops in building materials and garden equipment stores (down 2.2%), department stores (down 1.5%) and electronic and appliance stores (down 1.3%). The disappointing retail sales numbers are flagging a fairly significant slowing in consumer spending in the third quarter and may even result in growth in this expenditure area turning slightly negative after the annualized 1.7% gain in the second quarter. With support from the tax rebates waning, the impact of declining employment and falling net worth are likely starting to have the more dominant impact on household spending. One recent development that will help temper the dampening impact on spending going forward are the recent declines in energy prices that allow more disposable income outside of energy purchases. However, today's report makes clear the continuing downside risks to growth coming from this key expenditure area of the economy. This is expected to keep the Fed on the sidelines near-term, maintaining Fed funds at a still stimulative 2.00% through the remainder of this year and during the first half of 2009. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.