Retail sales snapped a six month winning streak in September, falling 0.3%, according to the Commerce Department.
Wall Street was expecting a 0.3% increase, but Greg Daco, chief U.S. economist at Oxford Economics, says the disappointing report is no reason to panic just yet.
“We have to be careful with any monthly number,” Daco tells Yahoo Finance’s “The First Trade.”
“Overall, the state of the consumer remains healthy. We are expecting to see some moderation [in spending] as income cools, but this report should not be throwing out alarm bells,” says Daco.
Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output.
Despite a global economic slowdown and less spending by businesses, the American consumer has remained the pillar of the U.S. economy, but the torrid pace of spending we saw in the spring and summer has proven to be unsustainable.
“We’re moving into an environment in which consumer spending growth numbers are going to be in the 1.5% to 2% range. It’s not quite recessionary, but it’s much slower growth than we were accustomed to in 2018,” says Daco.
The surprise drop in consumer spending was driven, in part, by a 0.9% decline in spending on vehicles, after a strong 1.9% gain in August. Consumers also pulled back spending at department stores, and for the first time this year internet sales fell, down 0.3%. Daco says that’s to be expected when you consider how far online sales have come.
“Online sales have been growing at a very fast clip, we’re talking double digit rates around 15% year-over-year, so a one-month blip is not something to write home about, but it is something to pay attention to,” he says.
Daco points to moderate spending at restaurants and bars as a positive sign for the economy, since such discretionary spending is the first thing to drop off when consumers are feeling less confident.
Economists say the unexpected drop in retail sales all but guarantees a third consecutive interest rate cut from the Federal Reserve on Oct. 30. Lower rates should encourage spending, as it makes it cheaper to finance large purchases such as a home or a car.
The September report throws into question whether holiday retail sales will be as strong as some are predicting. The National Retail Federation expects holiday sales to rise between 3.8% and 4.2%.
“What we’re expecting is a gradually slower trend for consumer spending, still well supported by employment and wage growth,” says Daco.
Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.