More Cause for Concern: Retail Sales Tank

We have yet another reason to be concerned about the direction of the US economy.

Earlier this month, we reported that the ISM index of national factory activity for September came in under 50 for the second month in a row. This indicates that manufacturing is contracting. The September ISM nonmanufacturing index wasn’t a whole lot better. It charted at 52.6%, down from August’s reading of 56.4%. It was the lowest reading in three years. The mainstream pundits warned that the disappointing service sector data could boost recession fears as this is the largest component of the US economy.

Yesterday we got the retail numbers for September and they were equally bleak.

Retail sales fell for the first time in seven months, dripping 0.3%. Analysts had expected sales to increase by 0.3%, The number looks even gloomier when compared to September of last year, when retail sales climbed 4.1%.

According to the Commerce Department report, US consumers slashed spending on building materials, online purchases and automobiles. CNBC said the report “raises fears that a slowdown in the American manufacturing sector could be starting to bleed into the consumer side of the economy.”

Auto sales saw their biggest decline in eight months, falling 0.9%.

Core retail sales not including autos, gasoline, building materials and food services were basically unchanged from last month. CNBC reported that the trend in core retail sales “hint at a marked slowdown in consumer spending in the third quarter.”

There are other signs that the US retail economy is cracking.

Shopping mall vacancies have hit an 8-year high. According to data from Moody’s Analytics’ Reis, 9.4% of units were unoccupied in Q3. That equals a post-financial crisis high reached in 2011.

And Credit card balances contracted in August according to the most recent consumer debt report by the Federal Reserve. The mainstream typically views credit card spending as healthy, assuming that it signal consumers are confident about the future. Of course, it could just as well mean they are tapped out and charging everyday purchases on plastic. In fact, the growth in consumer debt could signal Americans are struggling to make ends meet. After all, a lot of people use their credit cards as an emergency fund.

Whether driven by confidence or desperation, debt-fueled spending can’t go on forever and falling retail sales signal that Americans are pulling back. This is not good news considering consumption makes up about 66% of the US GDP activity.

The gloomy economic news has increased expectations of yet another Federal Reserve rate cut. Peter Schiff has said he doesn’t think the central bank will be able to rescue the markets again. When the stock market tanked during the fourth quarter of 2018, the central bank was able to reverse the decline because of a substantial reverse in policy with the “Powell Pause.” At the time, the Fed was pushing rates up and the central bank was engaging in quantitative tightening.

When the markets responded to those threats by collapsing, the Fed was able to do a complete policy 180, going from rate hikes to rate cuts, and in fact, going from quantitative tightening to effectively having quantitative easing. But if all that is already in play, if the markets start to tank again, I don’t really think there’s enough ammunition left in the Fed’s chamber there to have a meaningful impact on the markets, and I think traders are overestimating the ability of the Fed to rescue the market the way it has rescued it in the past.”