An Early Chill for Retailers in September

Retail sales dipped 0.3% in September, much weaker than most expected, even after adjusting for slight upward revisions to August. The largest declines were at traditional department stores and in motor vehicle sales. The GM strike is expected to put a damper on vehicle sales in October as well. Many of those buying GM vehicles work at GM and its suppliers; inventories are lean.

Nonstore retailers, which include online stores, fell slightly during the month after unusually robust gains over the summer. Amazon prime days last July pulled ahead some buying from later in the year. Gasoline station sales dipped on lower prices at the gas pump, but that usually frees up cash for spending elsewhere.

Building material and garden stores also suffered a blow. We did have surprise snow in some parts of the country in September, which could explain at least a portion of that weakness. We have yet to see a major uptick in spending at those types of stores in response to the recent increase in home sales. Indeed, spending at building material and garden stores is tracking less than one percent ahead of last year.

The silver lining in the report was that spending picked up at clothing stores and big-box discounters. Consumers may have scrambled to stock up on the long list of goods that were slated to be tariffed from China. Higher tariffs on everything from clothing to diapers went into effect on September 1, but they won’t show up in price increases until they reach retailers’ shelves in October.

Spending at furniture stores picked up slightly. Strong home sales are providing a boost for furniture sales. Those gains are expected to peter out in 2020. Mortgage applications for purchase have peaked in recent weeks, which suggests a pullback in home sales at the start of 2020.

Core retail sales, which strip out the effects of vehicle, building materials, food services and gasoline station sales, flatlined in September. These go into the calculation of overall consumer spending for the third quarter, which has slowed but not collapsed. We will be watching closely for a rebound on spending on services in September after a slowdown in August. Consumers pulled back on travel and eating out during August at the height of fears of a full-blown trade war with China.

Bottom Line
The consumer is slowing but still a major contributor to growth in the third quarter. We are looking for a further slowdown in the fourth quarter, but hoping to avoid the panic we saw in December of 2018 when the stock market collapsed and the government was shut down. The next deadline for a potential government shutdown is November 21. Voters of all political stripes hate government shutdowns, which are particularly costly for incumbents in an election year.

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