Retail Sales Weakened In September But The Trend Is Still Solid

Yesterday’s US retail sales report for September inspired breathless headlines in some corners that consumer spending hit a wall. But a closer look at the numbers still leaves room for a healthy dose of optimism. At the very least, it’s premature to confidently warn that the revival in retail spending that began in 2016 has run its course.

True, the monthly comparison reflected weakness at the headline level. Spending increased by a thin 0.1% last month, well below the 0.6% gain that economists were expecting, based on Econoday.com’s consensus forecast. But stripping out the most volatile components to identify core retail spending that aligns with the consumer spending component of gross domestic product paints a brighter picture via a 0.5% jump in September.

The Wall Street Journal attributes the downshift in headline spending to temporary weather factors — last month’s Hurricane Florence, in particular, weighed on retail sales at stores and restaurants in the Carolinas, which were hit hard by the storm.

In any case, monthly comparisons are noisy generally and so it’s best to focus on the trend by way of rolling one-year changes for a superior estimate of the signal. By that standard, the September results remain encouraging.

Let’s start with headline retail sales, which decelerated to a 4.7% year-over-year gain last month, the softest pace since April. That’s still a healthy gain, but it looks weak after four straight months of 6%-plus annual increases. To be fair, the recent run of hot annual gains wasn’t sustainable and so a degree of downshifting isn’t surprising.

More importantly, core retail sales held steady last month at a 5.0% year-over-year increase for a second month. In other words, the rebound in consumer spending that’s unfolded following the 2015-2016 slowdown remains intact.

“The net result still appears to be a fairly strong quarter for consumer spending growth,” notes Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

National Retail Federation’s chief economist Jack Kleinhenz also sees a growth bias prevailing for the near term.

Retail sales were somewhat softer than expected in September and some of the weakness can be attributed to Hurricane Florence and geopolitical trade concerns. Recent solid wage gains and other fundamentals continue to propel spending, which has been supported by tax cuts, saving and access to credit. Today’s numbers confirm an underlying strength in the industry and a solid trajectory as we go into the fourth quarter.

Meanwhile, a pair of GDP nowcasts from two regional Fed banks continue to project that third-quarter growth will deliver a robust gain in the preliminary data that’s due later this month. The current average of the output estimates from the Atlanta and New York Fed banks is 3.1%. Although that’s down from Q2’s sizzling 4.2% rise, a low-3% advance leaves plenty of room for assuming that the expansion is still running strong.

To be fair, there’s no shortage of risk factors to consider as potential spoilers in 2019. Lakshman Achuthan of the Economic Cycle Research Institute, for example, writes that the “housing market is raising serious red flags” because “real home price growth looks to have already entered a cyclical downturn that is likely to intensify as affordability worsens.”

Perhaps, but based on the hard numbers published to date the broad trend for the economy still looks reassuring. Will the good times last forever? No, but on the other hand it’s still not obvious that the macro party’s is about to end,