Weak US retail sales heighten fears over economy

Weak US retail sales heighten fears over economy

US consumers
Shoppers walk through the King of Prussia Mall, United States' largest retail shopping space, in King of Prussia, Pennsylvania. (Photo: REUTERS/Mark Makela)

WASHINGTON: US retail sales fell for the first time in seven months in September, suggesting that manufacturing-led weakness could be spreading to the broader economy, keeping the door open for the Federal Reserve to cut interest rates again later this month.

The signs of a deceleration in consumer spending reported by the Commerce Department on Wednesday (Oct 16) came on the heels of reports this month showing a moderation in job growth and services sector activity in September.

The economy is being hamstrung by a 15-month trade war between the United States and China, which has soured business sentiment, leading to a decline in capital expenditure and a recession in manufacturing.

"Weaker retail numbers provide further evidence that weakness in the manufacturing sector is spilling over into other areas of the economy," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Retail sales dropped 0.3 per cent last month as households cut back spending on motor vehicles, building materials, hobbies and online purchases. That was the first drop since February.

Data for August was revised up to show retail sales gaining 0.6 per cent instead of 0.4 per cent as previously reported. Economists polled by Reuters had forecast retail sales would climb 0.3 per cent in September. Compared to September last year, retail sales increased 4.1 per cent.

Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged last month after advancing by an unrevised 0.3 per cent in August. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Last month's drop and August's unrevised gain in core retail sales suggested a much more significant slowdown in consumer spending in the third quarter than economists had been anticipating after a surge in the prior quarter.

Consumer spending, which accounts for more than two-thirds of the economy, increased at a 4.6 per cent annualised rate in the second quarter, the most in 1-1/2 years. After the release of the data, economists cut their third-quarter consumer spending growth estimates to around a 2.5 per cent rate from a 3.0 per cent pace.

Signs the economy's growth engine was sputtering could further stoke financial market fears of a sharper slowdown in economic growth. Some economists speculated the cooling in hiring was probably making Americans more cautious about spending.

"The slowdown in job growth is perhaps starting to influence spending habits, but we'll need more data to confirm that thought," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Major US stock indexes were trading lower while prices of US Treasuries were mostly higher. The dollar was slightly weaker against a basket of currencies.


Though President Donald Trump announced a truce in the trade war with China last Friday, which delayed additional tariffs that were due this month, economists say the longest economic expansion on record remained in danger without all import duties being rolled back.

The International Monetary Fund warned on Tuesday that the US-China trade war would cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis, and expressed caution over Trump's so-called Phase 1 trade deal, saying more details were needed.

Growth is also being restricted by the fading stimulus from last year's US$1.5 trillion tax cut package.

With consumer spending slowing, a full trade deal still elusive and the likelihood of a disorderly exit from the European Union by Britain, many economists expect the Fed to cut interest rates at its Oct 29-30 policy meeting to keep the expansion, now in its 11th year, on track.

The US central bank cut rates in September after reducing borrowing costs in July for the first time since 2008.

"The weakness noted in the retail sales report will be seen by policymakers at the Federal Reserve as a cautionary note and will be yet another reason for the Fed to ease monetary policy again at its October meeting," said David Berson, chief economist at Nationwide in Columbus, Ohio.

The Atlanta Fed is forecasting GDP increased at a 1.7 per cent annualized rate in the third quarter. The economy grew at a 2.0 per cent pace in the April-June quarter, slowing from the first quarter's brisk 3.1 per cent rate.

In addition to the weak retail sales, third-quarter growth estimates could be lowered after another report from the Commerce Department on Thursday showed business inventories were unchanged in August after rising 0.3 per cent in July.

The government will publish its snapshot of third-quarter GDP at the end of the month.

Retail sales in September were weighed down by a 0.9 per cent drop in auto sales. That was the biggest drop in eight months and followed a 1.9 per cent acceleration in August. Receipts at service stations fell 0.7 per cent, likely reflecting cheaper gasoline.

Sales at electronics and appliance stores were unchanged, getting no boost from the launch of Apple's new iPhone model. Sales at building material stores fell 1.0 per cent. Online and mail-order retail sales dropped 0.3 per cent, the most since December 2018. That followed a 1.2 per cent increase in August. Spending at hobby, musical instrument and book stores dipped 0.1 per cent.

But receipts at clothing stores rebounded 1.3 per cent last month after falling 0.7 per cent in August. Sales at furniture stores increased 0.6 per cent. Sales at restaurants and bars gained 0.2 per cent.

Source: Reuters