Implications:   Retail sales rose unexpectedly in August, eking out a 0.1% gain  (+0.2% including revisions to prior months) versus a consensus expected decline of 0.2%. Despite the upward surprise, sales have been weak of late, and point to a softening economy that is starting to feel the lagged effects of tighter monetary policy.  Looking at the details of the report, August’s gain was driven by a 1.4% increase at nonstore retailers (think internet and mail-order) which helped mask declining sales across the majority of categories.  Overall, just five out of thirteen major categories rose in August.  Auto sales ticked down 0.1%.  Meanwhile, gas stations declined 1.2% as gas prices fell in August.  Stripping these out along with the other often-volatile category for building materials, “core” sales rose 0.2% in August.  These sales – which are crucial for estimating GDP – would be up at a respectable 4.4% annualized rate in the third quarter if unchanged in September.  But much of that increase is due to one category; online purchases at nonstore retailers are up at a 13.5% annualized rate in the last three months.  Things are not looking as good when looking at the service side of the economy.  Sales at restaurants and bars – the only glimpse we get at services in the retail sales report – were unchanged in August and up 2.7% in the last year.  It looks like tighter monetary policy is finally starting to weigh on this sector, with sales up at just 0.9% and 1.5% annualized rates in the last three and six months, respectively, lagging overall sales.  Meanwhile, overall sales are up 2.1% in the last twelve months, which has not kept up with inflation; “real” (inflation-adjusted) retail sales are down 0.4% in the last year and have remained stagnant for three years since peaking in April 2021.  This is consistent with our view of a slowing US economy that is starting to feel the lagged impacts from a drop in the M2 measure of the money supply from early 2022 through late 2023.

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