U.S. September Retail Sales Were Much Weaker Than Expected

Daily Forex Fundamentals | Written by RBC Financial Group | Oct 15 08 14:26 GMT |

September retail sales were very weak dropping 1.2% in the month. The earlier-reported drop in auto sales flagged a likely decline in the month though expectations were centred on a 0.7% drop. Excluding motor vehicles, sales dropped 0.6% compared to expectations of a more modest 0.2% decline.

The weakness in retail sales was led by the 3.8% plummet in motor vehicles sales that had been earlier flagged by indications that unit sales had dropped to recessionary levels (12.5 million units) in the month. However, the month also saw declines in most other categories with sales at clothing stores down 2.3% and sporting goods stores off 1.1%. We thought that there might be a reversal of some outsized August declines in electronic and department stores though that was not the case with both categories dropping 1.5% in the month. The one component that managed to eke out a gain were sales at gasoline stations which rose a minimal 0.1% after a large 3.0% drop in August reflecting, in part, a temporary stabilization in gasoline prices.

In a separate report, producer prices in September fell an expected 0.4% following a 0.9% drop in August. The lessening in decline in large part reflected less downward pressure from energy prices with the gasoline component down only 0.5% in September after a 3.5% drop in August. However, heating oil prices continued to show a large 13.9% decline after a 13.6% drop in August. More unexpected was the 0.4% rise in core prices that was double the 0.2% increase expected by financial markets. The pressure was led by gains in pharmaceuticals (+0.9%), capital equipment (+0.5%) and passenger cars (+0.5%). The gain in the latter was particularly surprising given the marked weakening in auto sales in the month.

The drop in retail sales suggests that the annualized decline in Q3 consumer spending will likely be closer to 3% compared to our earlier-forecasted decline of 2.3% following a 1.2% gain in Q2. This weakening reflects a number of factors including tight credit, high energy prices and some payback from the temporary boost provided by the tax rebate cheques. Of the three, the first factor poses the greatest continuing risk to the economy not only weighing on consumer spending but also, and more critically, investment spending. Our expectation is that recent aggressive government actions to free up financial markets will be successful in gradually easing the credit tightening though we are allowing for one more 50-basis point interest rate cut by the Fed before year end to assure that the extent of declining activity remains minimal. Though the unexpectedly large rise in core producer prices reported this morning does indicate that price pressures persist, we expect that the weakening in growth will prevent these pressures from persisting.

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.

Digg!