July retail sales came in below expectations today, signaling that the Canadian economy was already slowing.

“Total sales were very disappointing, dropping 0.5%, versus expectations of a 0.3% gain, and the second straight decrease,” says BMO Nesbitt Burns. Excluding autos, retail sales were off 0.6%, the worst monthly performance in over a year, it notes.

Lower gas prices were the main driver behind the weakness, so some economists are more encouraged by the report. “While far from a stellar month, the underlying retail performance was more encouraging,” says CIBC World Markets. “July may not have been an absolute write-off, but prospects for solid retail gains in the months ahead have been seriously clouded by Canada’s mounting layoff toll.”

RBC DS Capital Markets Research says, “it does appear the consumer has lost steam. Purchases of big-ticket items ‹ typically a good benchmark of consumer confidence ‹ were unimpressive. Vehicle sales contracted by 0.2%, extending the weakness seen in the prior two months. Furniture sales were also off to a sluggish start in the third quarter, after having contracted for the first time in five years in the second quarter. Clothing sales remained weak, declining for a second month in a row.”

TD Bank economists suggest that the accelerating pace of layoff announcements over recent months has set the stage for a rocky 2001 Christmas retail season — the most crucial period for the year for most Canadian retailers.

DS says, “Today’s report confirmed a more fatigued consumer. Spending would likely have been near-flat in the third quarter prior to the US terrorist attack on September 11, which will serve to further undermine an already vulnerable consumer. This report builds on a string of weak economic data suggesting that the Bank of Canada has more work ahead in cutting rates.”

BMO agrees, noting, “With retail sales down, manufacturing shipments heading lower, the trade surplus shrinking as exports lose ground, and employment fading, the stage was set for a disappointing third quarter before the tragedy in the U.S. The Bank of Canada will continue to cut rates.”

CIBC says, “[There’s] nothing here to jar our view of Bank policy, with Dodge and Company likely needing another 100 bps of easing before an economic expansion is revived in earnest.”