Pull back the lens on August’s U.S. retail sales data and a clear slowdown comes into focus. The 0.4% gain in retail sales for August appears reassuring, beating the consensus forecast of 0.2% growth.
However, July retail sales growth was twice as brisk as August, at 0.8% growth.
Moreover, only six of the thirteen categories of retails sales increased last month, down from ten categories in July. So, not only the pace but the breadth of retail sales growth was curtailed last month.Staying-In More Often
There was a significant monthly pull-back in the restaurant and bar sales category, down 1.2%. We watch this category closely to help gauge consumers’ willingness and ability to spend. Eating and drinking out are some of the most sensitive spending categories of retail sales to decline in consumer confidence. Those are areas where consumers have the immediate power to tighten their belts. It appears the trade war escalation in August and equity market volatility did get the U.S. consumers’ attention.
The real test of consumers’ spending resolve will be if restaurant and bar sales rebound strongly in September.
Retail sales also dropped sharply last month for department stores (-1.1%), clothing (-0.9%), gasoline stations (-0.9%), furniture (-0.5%), and grocery stores (-0.2%).
Looking at total retail sales on a three-month annualized basis, we saw peak growth of 9.8% in May 2019, and by August that three-month annualized growth rate slipped to 6.1%, the weakest reading since April.Consumers Are Not Made of Teflon
The bottom line is today’s retail sales report shows the U.S. consumer is neither made of Teflon nor are they deaf and blind to the economic and financial risks from the escalated trade war with China. If additional tariffs go into effect on October 15 and/or on December 15, expect more bad news from the U.S. consumer over the holiday shopping season. Even without further escalation, we think the U.S. consumer is ready to take a breather from their “shop-til-you-drop” marathon. Real average hourly earnings growth has only grown 1.5% over the past year and working hours are at threat as manufacturing activity contracts.A Slowdown is Still Coming
Consumers have kept spending mainly by dipping into both their personal savings and taking on new credit. There is no sign in these areas that the U.S. consumer is going into deep hibernation. However, we do see real consumer spending cooling down to 2.3% in the fourth quarter from a 3.6% gain in the current quarter. This is a sharp deceleration from the second quarter’s 4.7% gain. Despite the optimism on Wall Street about the prospect for an interim U.S. trade agreement with China being reached in October, we still see the economic slowdown that began in business investment and manufacturing sectors spreading beyond these categories into the service sector and ultimately reaching the consumer in 2020. The good news is that we are not forecasting a recession. However, slower growth next year increases the risk that a negative shock could push the U.S. economy in that direction.
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