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September Retail Sales Drop Stuns Street

The September U.S. retail sales report released Oct. 12 was quite a shocker: The headline number (including food services) dropped a whopping 2.4%, while the aggregate, excluding automobiles, fell 1.6%. The figures were much weaker than expected, especially given that these data run counter to the surprising strength in unit auto sales. The report also marks the steepest drop in sales since the North American Industry Classification System, or NAICS, series began, which only goes back to 1992.

As expected, the biggest declines were seen in discretionary purchases, such as motor vehicles/parts (-4.6%), restaurants (-5.1%), and apparel (-5.9%), while consumer staples did comparatively well. These figures are obviously very distorted from the "TV effect" -- consumers spending time glued to CNN instead of in the shopping mall -- in the week of September 11.

The key for the economy will be how soon -- and how strong -- sales bounce back. While there is some evidence that sales are returning to more normal levels, the prospects for an ongoing weakening trend in the labor market do not bode well. The extremely weak data suggest that consumption, and thus gross domestic product, will be weaker than previously thought for the third and fourth quarters. This makes it virtually a lock that the U.S. will qualify for the conventional definition of recession -- two consecutive quarters of negative growth. From Standard & Poor's Global Markets

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