Headline Misleading for Retail Sales

Retail sales rose a modest 0.1% in September after being revised down for the month of August. Sales excluding the vehicles actually fell during the month. The control measures of retail sales, which excludes vehicles, gas stations, and building material and garden stores rose a much more robust 0.5% during the month. The control measures is key as that data feeds directly into the estimate for overall consumer spending in the third quarter.

One of the largest outliers to the downside last month was a 1.8% decline in spending at restaurants and bars. At least a potion of that weakness can be traced to Hurricane Florence, which caused widespread flooding and closed places of business across several states.

The risk is that the disruption and devastation created by Hurricane Michael, which just hit the Florida Panhandle, and the recent spurt in prices at the gas pump could delay that rebound. Families living paycheck-to-paycheck suffer the most when prices at the pump rise. I have already talked to several people who have had to cut back on their discretionary spending in October to cover escalating commuting costs.

Spending at gasoline stations fell mostly in response to a drop in prices at the pump. Those losses will be fleeting but for the wrong reasons. As mentioned above, prices at the pump are moving up again. The concern is that they could spike ahead of holiday spending. Saudi Arabia has threatened to turn off the spigot on production and push prices higher in response to potential U.S. sanctions. Congress has threatened to levy sanctions in response to the journalist that went missing after entering the Saudi Embassy in Turkey in September.

Separately, September’s report underscored the pain at Sears, which declared bankruptcy this month. Spending at traditional retailers fell 0.8% over month. Spending at discount department stores has been particularly weak this year.

Spending at building material and garden stores was weak. We should see a rebound in spending at those stores as repairs following recent hurricanes get underway, but we are not seeing the kind of pickup following disasters than we once did. Insurance for flooding is too expensive for all but the most affluent of homeowners, while FEMA has limited what it provides in coverage.

Bright spots in the report were online, furniture, electronic and appliance, and sporting goods stores. The surge in spending in electronic stores can be directly traced the introduction of two new iPhones. Product launches at Apple have been the single most important factor driving electronic sales in any given month over the last five years.

Bottom Line
Consumers continued to spend at a fairly rapid pace despite some pockets of weakness in September. The categories that feed into the overall GDP figure for the third quarter remained particularly strong. Prospects for the fourth quarter are not quite as good given the recent spurt in prices at the pump and concerns those increases could persist. Rising gas prices are particularly hard on middle-class and low- income households due to the spillover effects on their discretionary budgets.

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