Retail Sales Drop In July   

  • Retail sales rose fell by a hefty 2.5% month-on-month (m/m) in July. This is slightly weaker than Statistics Canada’s preliminary estimate for a 2% drop. Adjusting for the impact of inflation, the volume of sales was down 2% on the month.  
  • Statistics Canada’s flash estimate for August points to a 0.4% m/m gain. 
  • The bulk of weakness in July was due to a drop in sales at gasoline stations, which fell by whopping 14.2%. Receipts at gasoline stations declined both due to lower prices at the pump but also due to lower demand overall, with the volume of sales down 9%. Sales of motor vehicle and parts also fell on the month (-0.5% m/m), after edging higher in the prior two months. 
  • Core sales, which exclude autos and gasoline, also fell by 0.9% m/m. This marked is the first monthly decline this year. In real terms core sales were down slightly more (-1.2% m/m). 
    • Declines were broad-based with weaker sales across most categories. Housing-related categories have all registered declines as demand continued to cool alongside the slowdown in the housing market. Sales were down 3.4% at furniture & home furnishings store, and were also lower at electronics & appliance stores (-2.8%) and building materials & garden equipment & supplies (-0.6%).    
    • Sales also edged lower at food & beverage (-0.8%), personal care (-0.3%) and clothing stores (-3.3%). 
    • E-commerce sales fell by 0.7% in July but were up 4.3% from the year ago.     

Key Implications

  • This retail sales report was unambiguously weak, suggesting that consumers tightened their purse strings in July. While some of the drag on headline growth was due to lower prices at the pump, consumer demand appears to have broadly cooled across most categories of spending. Consumers continued to cut back on driving, buying less gas even as prices fell, and also bought less of everything else, with core sales down in inflation-adjusted terms. 
  • Some drag to headline growth also came from a drop in auto sales – which account for a quarter of all retail sales. As noted in the TD Bank report, the semi-conductor shortages which weighed on production and inventory earlier, now appear to be easing, but there’s still a long road to full recovery. North American auto production remains quite low and is unlikely to return to its pre-pandemic level until the second half of 2023 The still-low inventory, combined with high car prices and a large increase in financing costs will likely prompt buyers to delay or forego car purchases. 
  • All in all, given the triple headwinds emanating from higher consumer prices, rapidly rising interest rates and a drop in wealth, consumers are becoming more frugal. This is in-line with TD Bank’s latest forecast, which points to a significant deceleration in consumer spending in the second half of this year.               

Source: TD Bank