Canadian retail sales slipped 0.5% in September, a bigger drop than most economists had expected.

The decline more than retraced an upwardly revised gain of 0.4% in the previous month, notes Bank of Montreal. “The trend in retail spending has been flat in recent months after rising moderately earlier in the year.” In constant dollars, retail sales were down 0.5% in September from August and up only 0.9% annualized in the third quarter from the second quarter.

“This morning’s report on retail sales for September likely acted to send a nervous chill up the spine of retailers just ahead of the crucial holiday season,” says TD Bank. “Despite today’s disappointing news, we believe that the recent softness in retail spending represents more of a lull, than the beginning of a fully-fledged pullback. For one, warmer-than-usual weather acted to temporarily delay back-to-school purchases in both August and September — a development that should, along with electricity rebates in Ontario, provide a boost to Canadian retail sales in the fourth quarter. Second, given the fact that consumers have been on a tear of late — evidenced by the fact that retail spending remained 7.7% higher than its year-earlier level in September — it is only natural for them to take a break. But, above all, the potent combination of healthy job creation and low interest rates remain firmly in place. In sum, brace for the recent lull to lift just in time for the holiday season.”

CIBC World Markets is floating the warm weather excuse too. “Who wants to think about buying a winter jacket when the weather’s so nice?” it asks. “The primary culprit behind this poor consumer showing was mother nature, as a wave of unseasonably warm weather delayed typical fall purchases.”

“Combined with the weakness reported yesterday in wholesale trade (down 0.7% in constant dollar terms), today’s report will partially offset monthly gains for manufacturers and utilities. All told, we’d look for September GDP at basic prices to eke out a 0.2% increase,” says CIBC. “Meanwhile, upward revisions to retail, wholesale and merchandise trade hint at a stronger reading for August GDP, earlier reported at just +0.1%. For Q3 as a whole, we look for an annualized 3.4% gain next week, falling noticeably short of the Bank of Canada’s earlier target of 4%. Note that the return of cooler temperatures should produce a material bounce-back in ex-auto retail sales in next month’s report.”

“The consumer has not been a major source of strength in the Canadian economy this year, with growth relying more on housing and inventory rebuilding,” says BMO Nesbitt Burns. “So, even with the hefty drop in retail activity, GDP in September likely still rose by 0.1%-to-0.2%, and Q3 will still probably post an annualized gain of a bit over 3%. However, the slowing trend in spending does point to some cooling in growth through Q4.”

Nesbitt says that today’s soft report will keep the Bank of Canada in a cautious frame of mind. “Overnight rates are expected to remain steady at the December 3 scheduled announcement date, before starting to rise in March of next year.”

CIBC agrees, noting, “With economic growth expected to continue its downshift in the final quarter of the year, remaining tepid during the initial half of 2003, stable rates look to be a feature of the Canadian landscape for the coming quarters.”