Retail sales rose by a modest 0.1% in August, missing expectations for 0.4% gain and marked the weakest print since February. The disappointment was tempered somewhat by the positive revisions to July’s data, with monthly growth upgraded from the already-solid 0.5% to 0.7%.

Sales at gasoline stations rose 1.65%, the largest monthly gain since May, but those at auto & parts dealers fell by 0.8%, a third consecutive monthly decline.

Sales at building material stores were flat in August, little changed since May. Following three blockbuster months, sales at food services grew by just 0.2% in August, but are still up 10% from a year-ago level. Indeed, putting aside the 20% increase over the past year in gasoline station receipts (which is largely a move in prices), growth in food services is the second fastest growing category.

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Excluding the above categories (gas, autos, building materials, and food services), the ‘control group’ used in calculating GDP rose by just 0.1% on the month – also below market expectations for a 0.4% gain. Delving into the details, sales of clothing were down 1.7%, while sales of furniture fell 0.3% and sales at food and beverage stores were flat.

Among the few categories where performance improved, sales at miscellaneous store retailers rose by a hefty 2.3%, while sales at health and electronics stores were up by 0.5% and 0.4%, respectively.

Key Implications

After several months of very solid spending, consumers took a break from shopping in August, perhaps enjoying the final days of summer in the pool rather than in the shopping malls. This was not what forecasters were expecting, but after several months of very solid numbers some moderation was bound to materialize, particularly in categories such as restaurants and eating out, which previously saw a string of very strong numbers.

Other categories, such as auto sales are feeling the pinch from rising interest rates and tighter lending standards, while sales of building materials are likely weaker due to the recent slowdown in the housing market.

The August break will likely prove short-lived (and data could still be revised higher). Given the incredibly hot labor market, signs of accelerating wage growth, and healthy household balance sheets, consumer spending is expected to remain solid in the months ahead. That being said, the pace of spending is not likely to match that of the past several months. As the tax cut boost fades, and higher rates weigh on interest-sensitive purchases, sales growth is likely to slow to around 0.2% to 0.3% a month.

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