Retail Sales Slump Raises Questions About Consumer Spending

One of the laws of physics, loosely phrased, is that an object in motion stays in motion, on its path, until outside forces act to change that path.

The outside forces may be coming to bear on the engine that’s led the economy on an upward path — the U.S. consumer.

As reported Wednesday (Oct. 16), data from the U.S. Commerce Department showed retail sales in the country were down 30 basis points last month. The news was less than stellar on two fronts, namely that 1) economists had expected gains — to the tune of positive 30 basis points — and 2) the data represented the first drop in seven months.

Digging a bit deeper, two other data points give pause. Sales at furniture and home furnishing stores slipped by 60 basis points. More ominously, online retail sales were down by 30 basis points — and online, of course, is where the sales have gone as brick-and-mortar stores continue to shutter. Though some observers took note of the fact that September’s slide was tempered by an upward revision to the August data.

There’s speculation about more rate cuts from the Federal Reserve, but we note that if it comes, sooner or later, it would be the third rate cut this year. The question comes: What would stimulate the consumer to spend if, after two rate cuts and a soaring stock market (which of course helps cement a wealth effect), the consumer has decided to pull back … anyway?

The September data may be a blip, sure. But it does come after a summer where consumer confidence has been lumpy. In August, for example, the expectations index slipped, to 107 from 112 in July. Then, in a reading earlier this month, the Michigan Consumer Sentiment was higher.

Mixed data readings, to be sure, but then again … the pocketbooks were not open in September. That’s underscored by the fact that, as Bloomberg reported, a “control group” for the latest data reading, stripping out food and gas and other volatile sales, showed basically flat spending.

In another gauge of consumer spending — evidenced from bank earnings this week — executives thus far are sanguine about the current state of affairs.

During the JPMorgan earnings call, CFO Jennifer Piepszak stated that credit conditions remain favorable and that “we do not see any signs of broad based deterioration across our portfolios, both consumer and wholesale.”  Later she said during the same call that “while global growth is slowing, the U.S. consumer remains healthy.” But, she noted, too, that ISM surveys, both manufacturing and non manufacturing, have been disappointing, and exist as cautionary signs. Citigroup management said on its call that overall credit quality remains stable, and global consumer banking was up in the low single-digit percentages. CEO Mike Corbat noted that downward revisions to global GDP growth forecasts from the IMF are “catch up to where many of us have been.”

In the meantime, the U.S. economy faces a crucial test for the fourth quarter, where as The Hill noted Wednesday, there still may be tariffs levied in December on consumer goods that come from China. Uneven spending and sentiment may result in a genuine pullback into the holiday season, which would limit good cheer, at least for retailers.