Anemic U.S. retail sales dim prospects of Fed rate hike
The mighty U.S. customer is suddenly looking like the weak link in the world’s No. 1 economy.
Unexpectedly soft retail sales have added to global concerns over slower growth — China being one of the biggest worries at the moment — and could force the U.S. Federal Reserve to push back plans for a long-anticipated interest rate hike.
But it also begs the question: What happened to the spinoff benefits of cheaper gas-pump prices, which were supposed to be putting more money into the pockets of consumers and be matched by steady growth in employment and wages that should be adding to the spending pool?
“It feels like the weight of the world, not just the domestic economy, is on the shoulders of the U.S. consumer at the moment ... (and) retail sales figures suggest the consumer was starting to buckle under the pressure towards the end of the (third) quarter,” said CIBC economist Andrew Grantham.
“With an important engine of the U.S. economy showing signs of stuttering, the odds of a December rate hike by the Fed have slimmed again.”
The Commerce Department on Wednesday reported store sales in the U.S. edged up by a disappointing 0.1 per cent in September — following equally mild spending data the previous month.
That caused analysts to fret that consumer spending, which makes up 70 per cent of the country’s economy, could continue to sputter along in coming months.
Most economists had forecast retail sales growth of 0.2 per cent in September.
With more than half of the 13 major U.S. retail categories declining last month, “this slower momentum suggests we could struggle to see three-per-cent growth in Q3 consumer spending,” Jennifer Lee, senior economist at BMO Capital Markets, said in a note.
“Removing the impact from cars, gasoline and building materials left a brow-raising figure. Core retail sales slipped 0.1 per cent in September, and — rubbing salt in the wound — July and August’s solid gains were trimmed.”
But James Marple, senior economist at TD Economics, said that, although the September retail report was disappointing for the consumer sector, “I don’t think it’s enough to lose faith.
“You saw some financial volatility in August and September — that was when the concerns about China really hit and you saw the correction that we had” in the stock market, Marple said in an interview.
“That may be something that hit consumer sentiment a little bit and came through in the numbers. But the underlying story of consumer spending being supported by the decline in energy prices, I still think that has some lengths to go,” he added.
“Wages growth is likely to accelerate. It’s absolutely essential that the domestic elements of the U.S. — like consumer spending and business investment and housing — continue to remain strong.”
There are still some major economic reports to come ahead of the Fed’s Dec. 15-16 policy meeting — two employment reports, along with GDP data for the third quarter and revisions to those economic growth numbers.
“Strong construction spending figures and strong vehicle sales numbers imply those should both support GDP — and vehicle sales by quite a bit,” noted Derek Holt, vice-president of Scotiabank Economics.
“There is still a decent possibility that consumer spending will be strong enough to support overall GDP. ... The question is one of extent.”
But already there are signs of more troubles ahead for the U.S. sales sector.
Wal-Mart Stores Inc., the world’s biggest retailer, on Wednesday warned its earnings could drop next year by as much as 12 per cent due to increased wages and investment in e-commerce.
The announcement sent the company’s share price down 10 per cent.
Although the U.S. Fed will also hold a policy meeting on Oct. 2728, it won’t be followed by a news conference with chairman Janet Yellen — a usual indication no action will be taken on rates during that gathering.
So all eyes are on the December decision or possibly the next one in January.
“With a question mark raised over what will be a key driver of growth moving forward, the odds of a December rate hike by the Fed appear to have slimmed again, although there’s a lot more data to see before that meeting,” said Grantham, the CIBC economist.