Recession Fears Rise as Retail Sales Fall

United States retail sales fell for the first time in seven months in September, signaling that a slowdown in the manufacturing sector may be spreading to the broader economy.

The October 16 Commerce Department report comes on the heels of recent data showing a moderation in job growth and services-sector activity in September. Retail sales decreased by 0.3% last month, the first monthly decline since February as households slashed spending on automobiles, online purchases, and building materials.

“This morning’s report solidifies concerns of the consumer’s inability to perpetually support the economy alone,” said Lindsey Piegza, chief economist at Stifel, an investment banking firm based in Chicago. “With business investment declining and manufacturing activity deteriorating, many investors brushed off fears of a slowdown because the consumer was still spending.”

The news wasn’t all bad. The Commerce Department’s quarterly report includes revised data for August showing retail sales gaining 0.6% instead of 0.4% as previously reported. This gain in August sales and the drop in September have prompted economists to cut third-quarter consumer spending growth estimates to a 2.5% annualized rate from 3.0%.

Consumer spending, which accounts for more than two-thirds of the economy, increased at a 4.6% rate in the second quarter, the most in 1 1/2 years, while September retail sales increased 4.1% compared with the same month last year.

“While this is by no means conclusive evidence that the consumer is wavering (after all, the upward revisions reduce the impact of September’s declines), it nonetheless reinforces our ongoing concern that a spending retrenchment will ultimately trigger a more durable slowdown,” wrote Ian Lyngen, head of rates research at BMO Capital Markets.

The strength of the US consumer serves as leverage for President Donald Trump in the prolonged trade war with China, but as the recent truce only postponed proposed tariffs for a month, many economists expect the Fed to cut interest rates once again at its October 29 meeting. If not, the longest economic expansion on record remains in danger.

"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.

Berson pointed out that a sudden significant drop in vehicle (0.9%) and gasoline (0.7%) sales might paint a more mixed picture than the decline in retail sales alone would suggest.

“Lower gas prices aren’t a negative for consumers. That’s actually positive,” said Berson, noting that unit vehicle sales rose in September according to figures from Autodata.

He added that he would need to see “a lot more than one month of data, particularly one month of data that has all these anomalies,” before becoming overly concerned about a slowdown in consumer spending.

Jack Kleinhenz, chief economist at the National Retail Foundation, shared a similar sentiment, pointing out that there are still plenty of positives in consumer trends. “The pullback in September compared with August is possibly a reaction to increased fears over U.S.-China tensions,” he said. “While uncertainty around trade policy and other issues has dampened consumer sentiment recently, consumers still have a lot going for them as evidenced by longer-term trends and factors like the tight labor market. September is a tricky month to measure because of seasonal factors like the end of summer and back-to-school spending, and this year’s early Labor Day may have moved up some spending into the last days of August.”