Poor retail sales report casts a shadow on domestic spending momentum

Retail sales rose 0.1% M/M in September, below market expectations for 0.2%. August's figure was downwardly-revised from 0.2% to 0.0%.

Strong sales at motor vehicle and parts dealers (+1.7%) were offset by lower sales at gasoline retailers (-3.2%), as the price of retail gasoline fell over 10% on on a seasonally-adjusted basis.

Excluding food services, building materials, motor vehicle dealers and gasoline stations, the retail sales control group - the measure which directly enters into the BEA's calculation for GDP - fell 0.1% M/M, significantly short of the consensus view for a gain of 0.3% M/M. Adding to the downbeat report, August's reading was revised down to 0.2% (from 0.4% originally).

Sales were mixed across categories, with gains observed in only six of 13 subcomponents. Besides auto dealers, sporting goods and hobby stores (+0.9%), clothing shops (+0.9%), and food services and drinking places (+0.7%) saw decent gains -  for the third consecutive month in the case of the latter.

Besides for gasoline stations, sales fell at miscellaneous stores (-1.3%) - which consists of office supplies and used item stores - building materials shops (-0.3%), and food and beverage stores (-0.3%).

This report was certainly a disappointment. While weakness was expected in the headline, owing to falling gasoline prices, the fall in the control group and negative revision suggests a deceleration in domestic spending momentum relative to recent months. With significant headwinds facing the economy's externally-exposed sectors, continued robust consumption remains crucial to the U.S. outlook.

One silver lining is the fact that purchases at food services and drinking places remained relatively robust. With the series showing significant correlation with spending on broader services since the financial crisis, this is likely a sign that services spending, which represents 65% of personal expenditures, has held up more strongly.

"Even with a ho-hum September, the retail control group, accounting for roughly 25% of consumer spending, still grew 4.2% annualized (in nominal terms) in the third quarter. This is almost exactly in line with the second quarter's showing, and implies continued strength in personal consumption growth in the third quarter", notes TD Economics.