Lower consumer spending in the automotive and general merchandise sectors drove total retail sales down 0.7% in March to $26.4 billion, Statistics Canada reported Wednesday.

This followed sales increases in February (+1.8%), January (+0.8%) and December (+0.2%). Excluding sales by motor and recreational vehicle dealers, the largest component of the automotive sector, total retail sales remained unchanged in March.

“With households having almost single-handedly kept the economy afloat of late, central bankers are no doubt on guard against any meaningful erosion in consumer momentum. They can’t be too comfortable then with the latest evidence of consumer fatigue,” says CIBC World Markets. “True, a 0.7% decline in March retail sales comes after a few solid months of growth, but the combination of March’s poor handoff and significant hurdles for April point to a notable deceleration in Q2 growth and perhaps beyond.”

TD Bank is more upbeat, noting that while the headline was weak, there are stronger signs beneath the headlines. It notes that the drop was due to auto sales falling off after a huge rally in February. Excluding auto sales, retail spending was flat, coming off two very strong months.

And, CIBC says, “Although March’s headline retail sales retreat was a few ticks softer than consensus expectations, February’s already-steamy advance was revised higher to 1.8%, effectively leaving the actual level of retail activity over that two-month period on consensus.”

BMO Nesbitt Burns notes that, apart from auto sales, general merchandise stores were largely responsible for March’s setback. “Also, a price-related 3.3% drop in gasoline sales exaggerated the weakness in ex-autos,” it says. “Most items of core retail sales showed some vigour, with clothing up 1.0% and furniture up 1.1%. The volume of retail sales fell 0.8% in the month after gains of 1.3% and 0.6% in the two prior months, and was up at a 5.4% annual rate in Q1.”

“In constant dollar terms, March’s 0.8% real retail sales decline wasn’t much worse than the reported nominal headline retreat,” says CIBC. “Again, that decline comes on the heels of a few sturdy monthly advances, and itself isn’t reason to panic. Still, strip out the impact of rising prices (largely runaway gasoline costs) and year-over-year growth in real retail activity, at 2.3%, is just half as fast as the 4.7% nominal pace.”

CIBC says that the weak report shouldn’t hurt quarterly results too much, but, “A March retreat marks a poor handoff for the second quarter. And watch out for April, as SARS and poor weather to say nothing of falling auto sales and eroding housing market demand are sure to dent retail results.”

Nesbitt notes that, in a separate release, StatsCan’s leading indicator was also a bit below expectations for April at +0.1%, following a +0.2% reading in the prior month.

“More indications that the Canadian economy is cooling, but no signs of real stress in these two reports,” says Nesbitt. “These are the last reports for Q1 prior to next week’s GDP report for the quarter. After a fast start to Q1, it appears that growth lost momentum, although GDP was still close to a 2?% annual pace in the quarter versus the preliminary estimate of 1.6% in the U.S.”

CIBC concludes that, “mounting concerns over the near-term economic outlook look to stop the Bank of Canada’s rate tightening program in its tracks.”