Retail Sales sluggish but not yet recessionary

From marketwatch.com:

Retail sales rose 0.3% in August, led by a 2.8% increase in auto sales, the Commerce Department said Friday. Excluding motor vehicles, sales fell 0.4%, the biggest decline since last September.

Sales were slightly weaker than expected, but an upward revision to July's figures to a 0.5% increase put the level of sales closer to expectations.

In a nutshell strong auto sales carried August retail sales. The number is not terrible but neither does it instill confidence. Why were auto sales so strong?

Heavy discounting seems to have been at work. This would also account for the contradiction between the strong same store sales growth at big chain retailers and the surprising weakness in categories like apparel which fell 0.1% in August according to today's report. For more info on discounting see this post over at THE BIG PICTURE.

Also of note yesterday was the first decline in manufacturing output in 6 months. Manufacturing fell 0.3% driven by - surprise, surprise, a 2.6% decline in automotive production. What does that tell you? Obviously auto makers had pent up inventory which they successfully shifted in August via heavy discounting.

How long can retailers continue to discount heavily? Who knows, however the longer they continue to do so the more it will affect margins and therefore earnings. In other news consumer sentiment was virtually unchanged from a month ago rising slightly to 83.8 from 83.4.

The consumer spending shoe has not dropped but it is definitely experiencing some slippage. It will be interesting to see what effect Fed rate cuts will have on consumer confidence as they contend with a worsening housing market, an increase in mortgage resets and looming higher gas prices with oil piercing $80 a barrel.