For some time, the story for the consumer has generally been a good one. Strong job creation has contributed to a high degree of confidence, which generally correlates to solid spending growth. While those underlying supports remain intact, consumer spending appears to have faltered in August, and retailers felt the impact.
Retail sales rose by a tepid 0.1% in August, falling well short of expectations for a 0.4% increase from the prior month. Excluding vehicle sales, the 0.3% monthly gain was modestly better. Upward revisions to the July results may help to take the edge off any negative response to the unexpected weakness. On a year-over-year basis, the increase of 6.6% remained solidly in line with recent results.
In a certain sense, some moderation in spending patterns should be expected given the outsized gains in the second quarter. It’s also important to note that one month does not make a trend.
The underlying fundamentals remain solid and should remain supportive of the collectively upbeat mood of consumers and their spending habits. Job creation remains strong, while layoffs remain exceptionally low. Wage growth appears to be heating up. On the whole, it appears that consumers should have both an upbeat disposition and the fuel to increase spending.
Of course, there are risks. There are signs that inflation is picking up, which would certainly dampen the positive effects from rising wages. Additionally, the increasingly sharp political divide and potential for rising trade tensions to boil over are threats to confidence. To this point, consumers have largely shrugged those factors off, but either has the potential to weigh on sentiment and spending.
The bottom line is that the August retail sales report raises a cautionary flag, but its significance shouldn’t be overstated. The trend is still positive, and one weak data point doesn’t signal a breakdown in that trend. It does indicate that, at least for a brief period, consumers took a break in their spending habits. The question that will need to be answered in the coming months is how long that slowdown will last.
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