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Daily Global Commentary

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October Retail Sales: Significant Slump in Consumer Spending, Speedy Rebound Unlikely

Thu, Nov 13 2008, 22:24 GMT
by Northern Trust Economic Research Department

Northern Trust

October Retail Sales: Significant Slump in Consumer Spending, Speedy Rebound Unlikely

Retail sales fell 2.8% in October, marking the third consecutive monthly decline. The October drop is the largest since record keeping for the current series began in 1992. The sharp drop in gasoline prices led to a 12.7% drop in gasoline sales. Auto sales declined 5.5%; reports of unit auto sales have indicated this earlier in the month. Excluding autos and gasoline, retail sales fell 0.5% in October. Most major categories of retail sales posted declines October – furniture (-2.5%), apparel (-1.4%), building materials (-0.4%), electronics (-2.3%) and general merchandise (-0.4%). Food (0.0), restaurants (+0.3%), and health and personal care (+0.4%) were the only components of retail sales that did not decline in October.

In other related news, the University of Michigan Consumer Sentiment Index held nearly steady at 57.9 in the early-November survey vs. 57.6 in October. Grim news about the economy day after day is most likely to translate into weaker consumer outlook in the near term.

It is important to note that the boom in consumer spending has come to a screeching halt after an extended period of spending that began in the fourth quarter of 1991 and ended with the 3.1% annualized decline in real consumer spending in the third quarter (see chart 3). The drop in net worth of households resulting from declines in prices of homes and equity, the historically high debt levels of households and the debt service burden associated with the debt, the rising trend of the jobless rate, additional likely layoffs, and a serious lack of savings are factors that will hold back consumer spending.

Import Prices Are Trending Down

The import price index fell 4.7% in October, marking the third consecutive monthly drop. These declines are tied to lower oil prices, which have declined for three straight months. Excluding fuel, import prices fell 0.8% in October after a 0.4% drop in September. On a year-to-year basis, import prices excluding fuel rose 4.8%, down from a peak gain of 6.7% in July 2008. A significant moderation in import prices is likely as commodity prices have plunged with growing expectations of a global recession.

Hong Kong Goes to Recessionland

The latest quarterly data released today officially confirm that Hong Kong is indeed in a technical recession. After a startling Q2 decline of 1.67%, real GDP continued its downward trajectory through Q3 posting a 0.5% contraction from a quarter earlier. Hong Kong became the second Asian economy thus far to officially tip into recession, after Singapore, and will certainly not be the last. (Japan reports Q3 figures on Monday.)

The two main culprits have been identified as exports and consumer spending. Hong Kong’s export/re-export sector is a vital piece of the economy and has been weakening along with developed-world demand. In the previous US recession (shaded area below), exports of both goods and services slowed markedly. In 2001 the US imported 23% of Hong Kong’s exports. Since then, that share has dropped to just 13.7% in 2007. In essence, the good news for Hong Kong is that this time around, it has a little trading partner called "China" to fall back on.

As for consumer spending, well, two quarterly contractions to start 2008 were hardly offset by the minimal 0.3% increase in Q3, and with asset values declining further in Q4, the already cash-strapped consumer will likely shun spending in favor of hibernation this winter. Needless to say, further GDP weakness is expected in Q4 and beyond, following the deteriorating nature of both domestic and external demand.

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Published on  Sun, Nov 16 2008, 22:13 GMT