U.S. retail sales fell 1.6% in February. Although the drop was greater than expected, markets appear to have shrugged off the news.

BMO Nesbitt Burns says that the weakness was spread across most categories. Ex-auto sales dropped 1%, it notes. “However, the sting of the dismal results for February was somewhat dulled by a large upward revision to the prior month — sales in January are now estimated to have risen 0.3% versus the initial estimate of a 0.9% drop. The entire revision reflected a change in auto sales to a drop of 2.6% from the first reading of -7.5%.”

“February’s sharp drop is not a complete shock, given the multitude of negatives stacked up against spending in the month — blizzards, terrorist warnings, soaring energy costs, and declining employment. Building materials were particularly hard hit, suggesting that other related statistics could also be very weak for February, notably housing starts,” says Nesbitt. “Clothing and furniture sales were also soft, but general merchandise was surprisingly robust in the month. Overall “core” retail sales (ex autos, gasoline, and building materials) fell a moderate 0.5%.”

“There are a number of potential factors contributing to this result, including very bad weather across much of the United States, the raising and lowering of terror alerts, concerns about a war with Iraq and its potential implications, high home heating costs and pronounced weakness in labour markets — 308,000 jobs were lost in February,” says RBC Financial. “Sales going into the spring should benefit from improving weather and continued spin-off effects of a booming housing market. But such effects could be overwhelmed if Americans stay home glued to their television sets if the United States were to launch a war with Iraq — the so-called CNN effect that retailers have experienced in the past.”

CIBC World Markets says that the upwards revision to January counters February’s soggier-than-expected headline, meaning that today’s report means that real consumer spending growth is still on track to weigh in just short of 2% for the quarter. “A 2% consumer does not look all that impressive against the trend of recent years, but should still be enough to stave off the threat of renewed recession. Higher oil prices remain a risk, however, and a protracted spike could do more damage to already shaky-looking auto sales.”

“The retail sales report is another clear indication that the U.S. economy temporarily froze in February, partly owing to the weather and partly due to the uncertainty ahead of a potential war with Iraq,” concludes Nesbitt “The so-called CNN-effect could keep activity subdued again in March.”.

In other economic news, RBC notes that Canadian motor vehicles sales entered the new year with significantly greater weakness than expected. Consensus had expected about a 9.5% decline over the previous month, but actual numbers came in down 14.1%. “January’s auto sales were a test of how the consumer would respond to diminished incentives. The results were not pleasant,” it says.

U.S. initial unemployment claims for last week were roughly in line with consensus expectations. A total of 420,000 Americans filed for unemployment insurance, down from the previous week’s 430,000, which was revised upwards. But, this is the fourth straight week above the 400,000 threshold.

Finally, RBC reports that there was a small further deterioration in the U.S. terms of trade, defined as export prices relative to import prices. “Import prices rose by 1.3% but, excluding the effects of rising energy prices, were up a more modest 0.4% such that much, but not all of the rise, was due to the price of oil. Export prices were up by only 0.4%. On top of rising oil prices, the fact the U.S. dollar has been weakening during the past year against its major trading partners — including a sharp drop against the Canadian dollar — is now having the effect of importing inflation from abroad,” it concludes.