U.S. Retail Sales Surprise on the Downside in February

In February, U.S. retail sales dropped 0.6%, contrary to market expectations calling for a 0.2% rise. This followed an upwardly revised 0.4% gain in January (previous: 0.3%). Excluding autos, retail sales dropped by 0.2%, which was contrary to market forecasts for a 0.2% gain.

In February, the weakness in retail sales was fairly broad based with only health/personal care stores, clothing and accessories stores, sporting goods stores and general merchandise stores posting gains. Housing related sales were all down. Sales at furniture/home furnishing stores dropped 0.5%, sales at electronics/appliances stores fell 0.4% while sales at building material and garden supply stores declined 0.7%. A decline in gasoline prices contributed to a 1.0% drop in sales at gasoline stations. On a year-over-year basis, retail sales were up 2.6%, the weakest pace of growth since January 2007. The component that feeds into the GDP addup, retail sales excluding automotive and building material and garden supply stores, dropped 0.2% though this was after an upwardly revised 0.6% gain in January. Relative to its Q4 average, sales excluding autos/building materials/garden supply stores were up an annualized 3.1%

With an increase in consumer prices in February probable, today's drop in retail sales implies that they were sharply negative on a real basis. Combined with the weak real consumer spending figures in January, today's data points to markedly slower consumer spending in Q1, consistent with our forecast for spending to basically stall over the January/March period. In fact, over the first six months half of the year, consumer spending is likely to be subdued. The arrival of the fiscal stimulus package will probably boost spending, though likely more so in the second half of 2008.

In a separate report, initial jobless claims for the week ending March 8th were released. They were unchanged at 353,000. The week prior, they were slightly upwardly revised to 353,000 from 351,000. The less volatile four-week moving average dropped to 358,500 from an upwardly revised 359,750 (previous: 359,500).

Tomorrow in Canada

Q4 Productivity figures will be released tomorrow. A deceleration in GDP growth coupled with an increase in hours worked points to declining productivity in Q4 after four straight quarterly increases. For all of 2007, productivity was likely up a paltry 0.8%, the weakest pace of growth since 2004. The further weakness in GDP growth will likely see productivity remain subdued over the first half of the year.

RBC Financial Group