Research

Economic Insights: Declining sales = trouble?

Consumer spending took a surprising dip in September… laying the groundwork for more slowing to come? 

October 23, 2019
Do declining sales signal trouble?

Retail sales data for September contracted unexpectedly, generating the weakest performance since February. Half of the retail subcategories posted declines and online sales declined for the first time this year, indicating a broad pullback. As we recently mentioned, consumers are driving the economic expansion as companies pull back on spending and investment despite massive incentives to do the opposite. The risk we highlighted – that companies might also pull back on hiring and wage increases – became more pronounced with September’s sales data. But thus far it remains just a risk. We generally expected consumer spending to slow due to a confluence of factors, namely slower net job creation and decelerating wage growth. And one month does not make a trend. But as the labor market cools off and companies continue to worry about trade policy uncertainty, scrutiny of the health of U.S. consumers will only increase.

Other factors also showing cooling

Industrial production for September contracted, worse than anticipated. The GM strike almost certainly contributed at least some of the weakness. And quarter-over-quarter growth came in positive. But undoubtedly deteriorating global economic growth, trade policy uncertainty, and a relatively strong dollar are restraining industrial production. Additionally, the Conference Board’s Leading Economic Indicators Index also cooled in September, declining to its slowest pace during the current economic expansion.

What else happened last week

The Fed began expanding its balance sheet in order to increase reserves and reduce shortfalls that disrupt the short-term funding markets. The Fed is aiming to bring reserves back to levels from early September. The Fed has gone to lengths to remind everyone that its actions do not constitute quantitative easing (“QE”) because these actions are not intended to alter asset prices and consequently interest rates.

What we are watching this week

We expect both existing and new home sales for September to decline, following relatively strong performance in August. We also expect durable goods orders for September to decline, at least partially due to the GM strike and the decline in demand for auto parts. We anticipated that the final reading for consumer sentiment for October should show an increase versus September levels, but it remains subdued relative to the last few years.

What it means for CRE

For commercial real estate (CRE), the risk of weakening sentiment and activity among businesses spilling over into consumers will remain pivotal for the balance of this year and into 2020. While consumer spending remains healthy, the sector should continue to perform well. But if contagion moves from possibility to reality, then CRE will find itself at greater risk. For now, we remain cautiously optimistic about the outlook for both the economy and CRE over the next 6-9 months. Momentum, particularly among consumers, remains robust enough to weather headwinds.

Thought of the week

Each year, tourists spend billions on “peeping,” also known as leaf tourism. The amount spent in New England alone exceeds $3 billion.

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