U.S. retail sales unexpectedly drop — a warning sign for the economy

U.S. retail sales unexpectedly declined in September for the first time in seven months, according to data released Wednesday, suggesting that consumers — the main pillar of economic growth — are starting to become shaky. This potentially bolsters the case for the Federal Reserve to cut interest rates again.

The value of overall sales fell 0.3% in September from August after an upwardly revised 0.6% increase in August, Commerce Department figures showed Wednesday. The median estimate in a Bloomberg survey called for a 0.3% advance.

Sales in the “control group” subset, which some analysts view as a more reliable gauge of underlying consumer demand, were little changed, missing projections for a 0.3% increase. The measure excludes food services, car dealers, building-materials stores and gas stations.

Prices on 10-year Treasuries rose and U.S. stocks fell after the data release.

The surprise drop in retail sales is the first such decline since February and may indicate cracks are forming in the consumer spending that has propped up U.S. economic growth in recent months. Together with weaker business investment and manufacturing, along with a lingering trade war, weaker consumption would increase risks to the nation’s longest economic expansion on record and complicate President Trump’s 2020 reelection prospects.

Despite solid income growth and other favorable fundamentals for consumers, “there were a lot of gloomy headlines” in September on topics such as trade talks, said Stephen Stanley, chief economist at Amherst Pierpont Securities. “People might have gotten a little cautious.”

Although consumer spending and job gains were probably solid overall during the July-through-September quarter, the latest figures as well as the employment report this month suggest a loss of momentum heading into the last part of 2019. Global economic weakness and trade head winds led Fed officials to lower interest rates at the last two meetings, and some central bank policymakers may see reason to cut again at their next gathering Oct. 29 to 30 in Washington.

Traders boosted bets Wednesday on an October rate cut by the Fed.

Stanley said more recent figures have shown improved consumer sentiment and trade tensions have eased a bit, which may encourage spending. “There’s good reason to believe that the consumer is alive and well,” he said.

Declines in automobile and gasoline sales drove most of September’s drop. Excluding those factors, retail sales were little changed, after a 0.4% gain in August.

A separate report Wednesday showed U.S. home builder sentiment climbed to the highest level since early 2018 amid cheaper borrowing costs and a still-sturdy job market.

The retail sales report showed seven of 13 major categories posted declines. Non-store retailers, which includes online shopping, fell 0.3%, the category’s biggest drop since December. General merchandise stores fell 0.3%; building materials slid 1%; and sporting goods, hobby, book and musical instrument stores slipped 0.1%.

Increases were led by apparel, health and personal care, and furniture and home furnishings. One sector — electronics and appliance stores — was unchanged.

Filling-station receipts decreased 0.7%, the report showed. The retail figures aren’t adjusted for price changes, so sales could reflect changes in gasoline costs, sales, or both.

Spending at auto dealers dropped 0.9%, the biggest decline since January, after rising 1.9% in August. Industry data from Wards Automotive Group previously showed the industry sales rate rose for a second month in September.

“It’s a surprise relative to expectations. It’s a surprise in the details. It is a bit more uniformly weak than a lot of people expected, including myself,” Steven Ricchiuto, chief U.S. economist at Mizuho Securities USA, said on Bloomberg Radio.

Retail sales estimates in Bloomberg’s survey of economists ranged from a 0.1% decline to a 0.7% gain compared with August.

Control-group sales have increased an annualized 6.8% over the latest three months, down from a 7.7% rate in the three-month period through August.

The sales data don’t capture all of household purchases and tend to be volatile because they aren’t adjusted for changes in prices. Personal-spending figures, which also include services, will offer a fuller picture of U.S. consumption in data due at the end of the month.