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It comes as no surprise, but it's bracing just the same.

U.S. retail sales slipped last month, falling 0.1% from June's level, based on a seasonally adjusted calculation, the government reports. Meanwhile, for the 12 months through July, retail sales rose a modest 2.7%. The casual observer may think that the numbers don't look so bad. Year-over-year growth, after all, is still growth, and in the current environments that's pretty good. Putting the numbers in economic context, however, suggests that the slowdown of late still has the upper hand.

Consider the chart below, which shows the rolling percentage changes in retail sales on a monthly and annual basis through July 2008. The red line shows that July suffered the first monthly decline in retail sales since February. Meanwhile, the black line reminds that year-over-year retail sales continued to retreat in relative if not absolute terms.

Clearly, the slowdown in retail sales is unmistakable. The broader trend can't be denied. But that only reveals what's passed. Thus, the two burning questions: How much longer will the downtrend go on? How bad will it get?

No one knows, of course, but if we anticipate a continued fading of the government's stimulus program that began in May, it's reasonable to think that retail sales will slump further in the months ahead. The counterpoint is that with oil prices retreating recently, perhaps the defacto energy tax will lessen, providing consumers with an unexpected boost in disposable income in the months ahead. Assuming, of course, that the correction in energy prices has legs.

Perhaps, then, it's reasonable to predict some sideways action in retail sales, i.e., neither growth nor decline in the ground-zero measure of consumer spending. Maybe, but we shouldn't get too comfortable with even that benign outlook. Keep in mind that if we look at the more cyclically sensitive corners of retail sales, the trend is unmistakably sobering. Notably, retail sales of motor vehicles and parts fell 2.4% last month and are down more than 8% from a year ago. When it comes to spending large sums of money, Joe Sixpack is speaking volumes by hiding his wallet.

Meanwhile, even among those retail areas that show growth, the trend in real spending is flat, if not down, after adjusting for inflation (running at a robust 5% for the year through June, as per CPI).

The slowdown, in short, still has momentum. What will change the trend? Convincing signs that the housing market is no longer contracting would help. A few months of energy prices treading water, if not falling, would be another plus. It wouldn't hurt if inflation's upside momentum takes a breather too.

But let's not get ahead of ourselves. The prospects for a vibrant rebound are still far off. The consumer is suffering on a number of fronts, and the weak retail sales are only one measure of the financial distress. Much depends on where we go from here for labor income, inflation and employment fronts. For now, caution is still the only game in town.

Source: Retail Worries: Slowdown Has the Upper Hand