Economists say the results of the U.S. retail sales report were worse than already pessimistic expectations, and will put consumer spending on the path to shrinking for the first time since 1991.

"We have a recession on our hands," said Jennifer Lee, economist at BMO Capital Markets, who noted the 1.2% drop in the headline is the worst monthly fall since June 2004.

U.S. retail sales fell by more than expected on both fronts in September, as the all-items index declined by 1.2% in the month against a -0.7% consensus forecast, while retail sales excluding autos declined 0.6% against expectations for a 0.2% drop, according to advance estimates released from the Department of Commerce on Wednesday.

"These results are clearly dismal but don't come as a surprise, particularly after major chain stores reported weak September sales and are bracing themselves for what the Wall Street Journal referred to as the 'gloomiest holiday shopping season in nearly two decades,'" she added.

Millan Mulraine, economics strategist at TD Securities, called the report "much worse than the market consensus," noting that on an annual basis, sales are down 1.0%, "which is the first time since October 2002 that we have had a negative print on this indicator."

The details of the report are "simply disturbing," he added. "On the whole, the strains on U.S. consumers are beginning to show, and this report is yet another indication that consumers are beginning to retrench their spending as they navigate against the headwinds coming from a weak domestic economy, tight credit conditions . . . and a deteriorating job market."

On a three-month annualized basis for the third quarter of 2008, retail and food services sales fell by 4.0%. That figure was also worse than anticipated, as revisions to the prior month were down one-tenth to a 0.4% loss, while the ex-autos figure was downwardly revised by two-tenths to a 0.9% decrease.

Year-over-year, sales are now flat; excluding autos, sales have gained 4.1% since last September.

Other U.S. data releases were pessimistic as well. The Empire State Manufacturing Survey hit a new record low, and core PPI inflation was the highest since 1991, advancing by 4.0% annually.

T.J. Marta, fixed income strategist at RBC, summed up the morning as follows: "US consumers are retrenching and will continue to do so as the stock market struggles, house prices decline, and the jobs market deteriorates. As the US consumer buckles, so goes the global economy and US manufacturing. Pipeline inflation remains worrisome, but the potential collapse in economic activity overwhelms those fears - for now."

The market reaction was mixed. Bond prices moved lower, presumably on the PPI results, while the dollar strengthened versus the euro and Canadian dollar, but fell versus the pound sterling.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008