Consumer spending in retail stores edged up 0.2% in December to $25.9 billion, after falling 0.5% in November.

Statistics Canada reported Thursday that December’s sales were strong for furniture stores and auto dealers, while food stores posted moderate gains. All other retailers experienced declining sales in December.

Total retail sales were up by 0.2%, well below consensus expectations for a 1% rise. Excluding autos, retail sales were down 0.2%.

“Outside of auto dealerships and furniture stores, cash registers in Canada were ominously quiet in December,” says TD Bank. It notes that the strong housing market is still driving strong furniture sales, and there were other pockets of strength in areas such as motor vehicle sales. But, drug stores, clothing stores, and general merchandise retailers were all weaker in the month. Still, TD notes that the weak December barely dented a year in which retailers racked up a strong 6% increase in 2002.

“When coupled with yesterday’s data showing a drop in December sales of computers and software, this morning’s release suggests that retail outlets not selling cars or furniture were likely disappointed by the run-up to Christmas,” comments RBC.

“While there is some merit to the view that the weaker year-over-year performance is reflecting the improvement in sales during December 2001, the trend is still somewhat worrying,” cautions TD. “In particular, there is little doubt that sales of autos and furniture will slow in the coming months, implying a moderation in overall retail activity if sales in other areas do not pick up. All told, today1s report suggests that consumers contributed significantly to economic growth in the fourth quarter, which we estimate will come in at around 2%-2.5%, but there are growing signs that consumer spending will be less of a driver of the economic expansion in early 2003.”

BMO Nesbitt Burns agrees that the Canadian retail sales results for December were disappointing, but barely tarnished the solid gain for the full year. “However, the slowing trend in spending does point to some cooling in growth, particularly as vehicle sales and housing starts declined in January.”

CIBC world Markets points out that, while the nominal headline sales were soft, a 0.6% real sales gain means retailing will offer some notable support for monthly GDP. “Together with a solid real wholesale trade advance, this report helps offset some of the factory sector weakness reported earlier in the week. Still, with monthly output likely advancing by no more than 0.2% in December, next week’s Q4 real GDP report is expected to show quarterly growth downshifting to roughly 2% below the economy-s non-inflationary potential growth rate.”

“If, as we expect, the recent trend towards soft economic results continues (including a moderation in employment and housing, on top of tentative stateside industrial demand), markets will be forced to rethink the Bank of Canada’s conviction when it comes to delivering aggressive monetary tightening,” concludes CIBC.