Retail Sales and Pricing Pressures Slacken in October

Retail sales dipped 0.3% in October, reflecting some giveback to strong gains in September and a few losses associated with Hurricane Sandy. Vehicle sales were among the hardest-hit by that storm, as East Coast consumers  (who are a significant portion of sales because New York and New Jersey account for more than 12% of all non-auto spending) readied themselves for the storm. Indeed, spending at grocery stores and gasoline stations spiked during the month, despite a decline in prices at the pump. Power outages and the push to batten down the hatches prior to the storm also appear to have taken a toll on online spending, as people literally had no way to order or receive things. That said, not all of the weakness can be attributed to Sandy, as same-store sales were already weakening in the weeks prior to the storm.

Retail sales for November are likely to remain weak. We could see a fairly substantial bounce in December, however, once repairs and rebuilding get underway. Insurance companies have already reported more than 200,000 claims for vehicle damages, many of which will have to be replaced outright.

Sandy-related repairs and replacements are also likely to distort holiday spending, given the large population that was affected. Manhattan alone accounts for almost 20% of all spending at luxury retailers; much of that will be shifted towards repairs and rebuilding.

Separately, producer prices fell 0.2% in October mostly on lower energy prices. Food prices edged up 0.4%, mostly in response to the summer’s drought. Most grocers, restaurants and large food producers, however, have reported an inability to pass along raw food price increases to consumers. That means that very little of the drought effects will show up in consumer prices. (The exception is some fruit, vegetables and meat; pork prices rose 8.1% with the run-up in feed costs.) Consumers continue to make substitutions at the grocery store, but that leaves food producers squeezed a bit on some of their margins. A further fall in oil prices would be welcome news, as transportation costs also make up a large percentage of producer costs.

Also today, mortgage applications surged for both purchases and refinancings last week, following a Sandy-related lull. This will further skew spending toward housing-related durables and vehicles as we move into 2013.

Bottom Line: Sandy exacerbated the giveback in October to much stronger-than-expected sales in September. As consumers drain wealth via insurance claims and savings to make repairs, we will see a fairly sharp rebound in sales, but probably not until December. The move into spending on housing and vehicles, in particular, will be enhanced as repairs get underway. Remodeling and the use of refi savings for car payments had already started to pick up ahead of Sandy. Another plus later in the year and into 2013 could be a rather substantial drop in energy prices.

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