Consumer spending accounts for more than two-thirds of economic activity in the US, so when consumers show signs of running out of gas, the entire economy may be in trouble.
Retail sales rose just 0.2% in August, down from a 1.4% increase in July. Excluding auto sales, which can be volatile, retail sales still rose just 0.2% versus a 0.6% rise in July.
Economists had predicted a decline of 0.2% for overall retail sales because of an expected slump in auto sales. Automakers had warned of a sharp drop in US auto sales last month.
"I am puzzled by this report. There seems to be somewhat of a disconnect," Scott Hoyt, economist with Economy.com, comments to CNN Money. "Whenever you've got a strange disconnect like this, you have to anticipate a downward revision next month."
Ian Shepherdson, chief economist with High Frequency Economics, wrote in a note, "Overall, this report is softer than it looks. The headline is flattered by an inexplicable increase in auto sales, which cannot be squared with the 6.3% drop in unit sales reported by the automakers. Expect a downward revision."
Sliding energy prices didn’t offset the impact of a slumping housing market on consumers, says CNN Money.
"It's easy to overdo the gas price effect," Scott Hoyt tells CNN. "Housing has a more serious consequence on spending patterns because slowing housing activity has an adverse effect on household wealth and mortgage equity withdrawals. With a cooling housing market, consumers have less cash to pull from their homes to spend elsewhere like electronics and furniture."
In the recent housing boom, rising home prices were creating equity, allowing homeowners to draw on a line of credit or refinance their homes to get cash. Now that home prices have started going down, there is hardly any home equity left. Thus we will continue to see slower consumer spending growth.
However, the iShares Consumer Discretionary ETF (NYSEARCA:XLY), was recently at a 52-week high. Does the market have it wrong?