Retail Sales – Momentum Faded Sharply Prior to Katrina

by Brian Bethune

• Sales retrenched sharply by 2.1% in August.
• The decline comes on the heels of strong gains in the previous two months.
• Motor vehicles and parts collapsed by 12% - excluding autos sales were up 1%.
• Not surprisingly, gasoline sales jumped by 4.4%.
• Excluding autos and gasoline, retail sales gained 0.5%, driven mainly by higher food and health care products, building materials and home furnishings.

Prior to Katrina, growth in employment, compensation and disposable income -- the pillars of consumer spending -- were solid. The momentum for retail sales excluding motor vehicles and gasoline, however, started to erode in July and August as gasoline prices moved up sharply. Motor vehicle sales, which responded nicely to discount programs in June in July, are now showing signs of fatigue, and even with the continuation of various discount programs they are expected to drift down to near 16 million units in September and the fourth quarter of 2005.

Enter Katrina and even higher gasoline prices in the month of September, and you have the ingredients for another potential setback for retail sales excluding gasoline in the month of September. This will be partially offset by a sharp increase in sales of food and beverages as FEMA stockpiles are replenished. In addition, a strong housing market should lead to continued strength in building materials and home furnishings.

Retail sales excluding gasoline are transiting through a rather rocky "soft patch" at the end of the third quarter – only the expected continuation of a strong housing market will keep the retail sales raft lashed together in the immediate aftermath of the Katrina storm.