Canadian Consumers Resilient in August

• Retail spending climbs by 0.8% in August, with gas and auto sales contributing primary boost but housing-related spending also gaining.
• While still down against year-ago levels, consumption growth is on clear upward trend.

Canadian retail spending returned to an upward pace in August, with a monthly gain of 0.8% more than offsetting July's 0.5% dip. A 0.4% M/M uptick in sales volumes helped the gain, but rising prices - in particular a 3% hike at the gas pumps - accounted for much of the improvement. Although still well below year-ago levels, the 3-month moving average for sales growth remains firmly positive, pointing to a continuing recovery in Canadian consumer expenditure. Rebounding consumer spending, particularly propelled by the strength in housing-related expenditures, demonstrates the traction of low interest rates and households' strong access to credit. The relative strength in consumption, concurrent with a continuing decline in exports, shows a greater reliance on domestic demand to sustain recovery during the near-term.

Rebounding automotive expenditures accounted for the bulk of the monthly uptick, with rising pump prices fuelling a 3.9% M/M increase in gas sales and new vehicle purchases up 2.2% M/M. However, seasonally-adjusted unit sales of new vehicles actually declined in August, showing that higher auto purchase prices were the source of the increase. In addition, the overall consumer price index for new vehicles declined in August, further implying that the observed increase in retail prices of purchased vehicles was driven by a shift in composition to more up-market autos - although we do not see such a trend as likely to persist. As well, after a strong gain in July for North American-manufactured autos, these retreated in August, and passenger vehicles manufactured overseas - particularly in Japan - saw a strong advance.

Retail sales of home-related goods fared strongly in August, with sales of building supplies and furniture on the steady mend. This assuredly owes to the strong pace of home re-sales and related household borrowing that we have observed in the past months. As pent-up demand eases and higher fixed-term rates moderate mortgage borrowing, we do expect that the pace of home sales will slow into the autumn, but the spur to consumption through housing-related expenditures should persist into early 2010 - in particular, as renovations are completed ahead of the home renovation tax credit's February expiration.

Given the inelasticity of food expenditures, it is no surprise that food retail remains positive year-over-year. However, supermarket purchases, which had surged during the uncertain fall and early winter, have ebbed steadily since March, potentially reflecting a return to dining out as confidence builds after some initial belt-tightening. Alcohol purchases accelerated in August to 3.3% Y/Y, evidencing heightened guzzling amid the tepid recovery.

Continued declines were witnessed in home electronics, and computer retail continued to contract. Hobby stores were also on the decline. However, sales of clothing and accessories both saw improvement in August.

August's print confirms our forecast for improving consumption growth in the third quarter, with strengthening durable goods purchases as the main driver. Looking forward, consumption should build steadily as incomes improve and households gain confidence. And, with stateside export markets held down by a tepid U.S. recovery, the rebound in consumption will be crucial to sustaining Canada's economic recovery.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.