Retail Sales Fuel Economic Momentum

• A 10.6 percent spike in automobile purchases in August generated a 2.7 percent surge in total retail sales, the largest monthly increase since January 2006 and the latest sign that the recession may be ending. Excluding the spike in auto sales, which was fueled by the “Cash for Clunkers” program, retail sales rose 1.1 percent during the month.

• Despite the uptick in August, retail sales remain down 5.3 percent on a trailing 12-month basis. Modest year-over-year increases may occur in the months ahead, but comparisons will be made against the depressed level of sales in the fourth quarter of last year. Indeed, retail sales remain constrained, falling 8.6 percent year to date through August compared with the corresponding period in 2008. Spending has suffered as a result of the weak labor market and will not rebound significantly until employers start to hire again.
• Some of the factors that contributed to the increase in retail sales last month may be difficult to sustain. A government rebate propped up auto sales in August, and, without the aid of significant intervention in the months ahead, demand may falter. A 5.1 percent jump in sales at gas stations attributable to higher prices also sparked a rise in retail sales; excluding autos and gas, sales rose by a tepid 0.6 percent in August.
• On a positive note, eight of 10 retail categories posted increases in sales in August, compared with only two categories in July. Some of the rises may be due to seasonal factors such as back-to-school shopping or the relief of pent-up demand. Housing-related sales declined in August, though, with sales of furniture down 1.6 percent and sales of building materials falling 1.2 percent. The rebound in the home sales, partly fueled by the government’s first-time homebuyer credit, appears to be insufficient to stimulate demand for housing-related goods thus far.
• Retail property fundamentals remain battered. In the first half of 2009, diminished spending forced stores to close, resulting in negative net absorption of 50 million square feet nationally. More stores have closed in the third quarter, and few retailers are expanding. As a result, vacancy will rise to the 10 percent range in the quarter as occupied space decreases and vacant new space continues to come online.
• Despite the surge in retail sales in August, hospitality properties are still suffering from the economic downturn. Preliminary data estimates occupancy of about 61 percent during the month, compared with 67.5 percent one year earlier. While government rebates to purchase autos caused retail sales to spike in August, the year-long attempt by hotel owners to boost demand by slashing rates has not improved property performance.