What do Slowing Retail Sales Mean for the Economy?

The U.S. Department of Commerce reported on Wednesday, October 16 that retail sales for the month of September had dropped 0.3%. To put what may seem like a small decline in context, it is the largest drop in retail sales in seven months. And, it was a miss for analysts’ expectations of a 0.3% increase.

The market, as it is prone to do, dropped on the soft number. Despite relatively strong earnings reports to kick off earnings season, particularly from J.P. Morgan Chase, the market was in a wait-and-see mood that was dragged down by the Commerce Department’s report.

Of course, the logical question is what does this mean? I don’t think it means a whole lot for a couple of reasons.

The holiday sales forecast looks strong

First, multiple groups including the National Retail Federation (NRF) and Deloitte are forecasting holiday retail sales to increase. The NRF expects retail sales to grow between 3.8 percent and 4.2%. The NRF five-year average for holiday sales has been 3.7%. The methodology that the NRF uses excludes gas stations, auto sales, and restaurants.

Deloitte paints an even jollier picture with a forecast of holiday retail sales to exceed $1.1 trillion, which would be an increase of 4.5% to 5%. In 2018, the U.S. Census Bureau recorded holiday retail sales of $1.09 trillion and a sales growth of 3.1%.

And make no mistake about it, digital sales will once again be a big story this holiday season. Deloitte is forecasting e-commerce sales to grow between 14-18%, a significant increase over the 11.2% growth in 2018.

“I think this will be a surprise for our clients,” said Rod Sides, vice chairman of Deloitte’s U.S. retail and distribution practice. “I think most (retailers) would expect a slightly lower increase. … This is probably bigger than those expectations.”

The Commerce Department’s report was influenced by “special factors”

I love data and statistics as much as the next investor. But I always find that you have to be careful at taking the data at face value. And that’s the case with this report. In fact, almost immediately after the report, you could see analysts pointing out qualifiers to the data.

One of the big reasons for the spending decline was a large (relatively speaking) 0.7% dip in gasoline sales. But with unemployment still being well contained what does that mean? Well, for the U.S. consumer it was likely attributed to lower prices at the pump.

Another large negative on the report was a 0.9% drop in automobile sales. This is also not unusual as many consumers wait until the holiday season for planned auto purchases as dealers slash prices to clear out inventory.

Plus, the August retail sales number was revised upwards from 0.4% to 0.6%. The summer months (June-August) showed unusually robust retail sales numbers. It was logical that consumers would take a pause, particularly if the robust holiday forecast is to be believed.

The wild card is consumer confidence

The Consumer Confidence Index has now declined for two straight months. The Present Situation Index and The Expectations Index showed similar declines. This would suggest that consumers are not as positive about current economic conditions as the rosy holiday sales forecast may be factoring in.

Consumer confidence is considered to be one of the strongest economic indicators. But some economists are conflicted over how predictive of an indicator it is. While it’s fair to say that the numbers don’t lie, it’s impossible to assign motivation to every consumer.

The bottom line on what today’s report means for retail sales

One of the reasons I don’t believe investors should be all that worried about the retail number is that, on the surface, it was predictable. The markets are driven by investor psychology. All consumers have been hearing about is impeachment, a trade war, the ongoing conflict between Hong Kong and China, and a recession that’s going to happen – although nobody knows exactly when. It’s only logical that the consumer if surveyed would express less confidence about the economy.

However, consumers have been hearing about many of these same issues for months and it hasn’t really affected them. Nevertheless, while there are many benefits to a 24/7 news cycle, one undeniable truth is that the media has a way of moving markets as never before.

But does that correlate to a decline in personal spending? Transunion is reporting that total credit card balances will show a 4% increase from 2018. The total balances at the end of 2019 will be $840 billion. In the same report, the firm reported that total personal loan balances were expected to reach a record high of $156.3 billion by year’s end.