Canadian Retail Spending Sluggish in July

• Weaker than expected auto sales hold back retail spending
• Ex autos, sales up a healthier 0.4%

Retail sales were weaker than expected, rising slightly by 0.1% in July, following a 0.6% increase in June. Much of the weakness in the report can be attributed to weaker than expected automotive sales, falling for a second month with a drop of 0.6%. Ex autos, on the other hand, rose by a healthier clip of 0.4%.What is surprising is that the nominal headline number was up only marginally, despite gas prices peaking at $1.40 per litre in July. Net of inflation, retail sales were not all that different from the nominal sales, remaining flat in the month following two months of declines. This report suggests that while the Canadian consumer maintained some spending momentum, they were already shying away from purchases. So, while retail sales are up 4.9% from a year ago, this is likely to continue to weaken with gas prices still elevated and some ongoing softness in labour markets.

Other than autos, there were only two other items that consumers cut back on in July. Sales at clothing and retail stores fell 0.4% in the month, although this comes after a very hearty increase in June of 3.5%. In addition, as abnormal rain conditions in Canada cut into barbeque season, Canadians cut back on their consumption of food and beverages, in particular on alcohol consumption. As a result receipts at food and beverage stores fell 0.3%. These declines were offset by increases in five of the other sectors. In particular, the strongest sales were in furniture, home furnishing, and electronic stores, with an increase of 1.8%. Sales in this sector have been quite robust for the last four months, indicating that consumers are not yet ready to shy away from big ticket items. With housing starts data weaker than expected in July, and following a downward trend, we don't expect this strength to continue into the future. Given that spending on household items tends to lag housing starts, sales at these stores will be softer through 2009.

July's headline number suggests that weak hiring and elevated gas prices are slowing consumers down. Moving forward, the story is two fold. Easing prices at the pump will bring nominal retail sales more in line with the trend seen in real sales over the last three months. Further, weaker employment prospects in the end of 2008 through 2009 will put downward pressure on wage growth, leaving less room for retail spending, especially for larger purchases. Overall consumer spending will moderate through the last half of 2008 and well into 2009, when compared to the robust levels of the last four years. However, with income growth remaining positive we are unlikely to see contractions of consumer spending as in the U.S.

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.