USA: Consumers Falling off a Cliff

Overview: The September retail sales disappointed with a steep 1.2% m/m decline (DB: -0.8%, Cons: -0.7%). Excluding autos retail sales gives a somewhat softer, but still significant, decline of 0.6% m/m (DB: -0.3%, Cons: -0.2%).

The weak data arrives on the top of some disappointing readings in August and July confirming that the underlying trend in consumer spending is now deteriorating at a rapid pace. In short, the data leaves little doubt that consumers are now in a recession.

Details: In September the weakness in personal spending was broadly based with most components contracting. One surprise was that gasoline sales did not subtract from total sales. This suggests that the nominal impact from lower gasoline prices had not yet fed though into data, which in fact only makes the weakness in the report even more evident.

The data implies that real personal spending in September will decline by around of 0.4% m/m. On top of this, revisions to prior months indicate that the estimate for real personal spending will be lowered by 0.05pp in August and July. This puts real Q3 spending on track for a hefty decline of around 3-3.25% q/q AR.

Assessment & Outlook: Following a temporary boost from the tax rebates, the three month trend in core retail sales (i.e. retail sales ex. autos, building material and gasoline) have slowed from 8% annualised in July to a cycle low of 0.5% annualised. These are levels not seen since the 2001 recession.

We expect Q3 to be the worst quarter for consumer spending in this cycle. Heading into Q4 several drivers of consumer spending will remain negative. This includes income growth, unemployment rates, and wealth and credit effects, on top of a negative drag on growth from the fading tax rebates. However, the very sharp decline in energy prices has not yet had an opportunity to work and will add a significant boost to real income growth in Q4. This will add some cushion to US household spending, but we are still looking for declines in consumer spending in Q4 and Q1.

While consumer spending growth is likely to see the worst performance in Q3, we look for Q4 as being the weaker quarter on GDP growth. Firstly, the current weakness in domestic demand will accumulate in Q4, as production and CAPEX reductions will emerge with a lag. Moreover, the contribution from net exports will slow faster in Q4 than in Q3. Our current forecast is for the economy to contract in Q4 and Q1, but given today's data, the likelihood for a contraction in Q3 as well has increased.

Danske Bank
http://www.danskebank.com/danskeresearch

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