September retail sales down, Q3 sales up
Retail sales declined 1.2 percent in September, more than reversing the previous month's 0.6 percent rise. Plunging auto sales were the main culprit, although not the only one behind September's sales drop. Excluding autos, sales edged up 0.1 percent in September after gaining a modest 0.3 percent in August. Sales were sluggish in September across major groups, although sales gained at building materials stores, health and personal care stores, and at sporting goods stores. The chart below shows that the pattern of growth was somewhat different in the third quarter than in the second quarter.

Overall, total retail sales were stronger in the third quarter than in the two previous quarters, spurred by sharply rising motor vehicle sales. Just like last year's fourth quarter, the July-to-September period saw healthy incentives spur motor vehicle sales. Excluding autos, retail sales were weaker than the two previous quarters.

Consumer spending is likely to weaken in October simply because the longshoremen's lockout prevented dock workers from unloading goods that were meant for grocery stores as well as other retailers. But as long as an agreement is reached by the end of the "cooling off" period, stores should be filled with goods in anticipation of the holiday selling season.

The University of Michigan's consumer sentiment index fell in mid-October but many analysts (and bond and equity traders as well) downplayed the figures. Market players are coming to the realization that monthly consumer sentiment figures are not strongly related to consumer spending decisions.

PPI: inflation remains tame
The producer price index rose 0.1 percent in September after remaining unchanged in the previous month. Energy prices jumped 0.9 percent for the month but food prices dropped 0.6 percent. Excluding these two volatile components, the PPI increased 0.1 percent in September, reversing August's 0.1 percent drop. The overall trend in the PPI remains favorable. The total PPI was down 1.9 percent from a year ago, while the core PPI was 0.4 percent lower than last September. This was the third straight month in which the core component was down from year-ago levels. Prices were subdued across the board, although declines in computers and light truck prices helped push down the index in September.

The PPI at earlier stages of processing was also subdued in September. The intermediate goods index (excluding food and energy) was up 0.1 percent in September; the crude materials index (excluding food and energy) was down 0.6 percent for the month. Notice that the crude goods index varies more sharply than either the intermediate or finished goods indexes. Given the soggy pace of the recovery, it is likely that price increases for crude goods faced by manufacturers will not be passed along the pipeline. This may bode well for keeping consumer goods prices stable, but it won't help profit margins any.