KEY DATA:  Sales: -0.3%; Over-Year: +4.1%; Ex-Vehicles: -0.1%/ NAHB: +3 points

IN A NUTSHELL:  “The surprisingly weak retail sales may not be telling us the canary is falling over.”

WHAT IT MEANS:  As I noted a couple of months ago, if consumers are driving growth, then consumer spending has to be the canary in the economy.  On the surface, today’s unexpected September drop in retail sales might be taken as a sign that household broad shoulders are drooping.  But I am not that sure.  Yes, the details of the report were pretty awful.  Spending on vehicles, gasoline, building supplies, general merchandise and even the Internet were down.  There was a sharp rise in purchases of furniture and health care products, and we ate out a little more, but that was largely it.  But gasoline prices were down, so we can take that out.  Vehicle demand is still reasonably good and indeed, the annualized pace of salesin September was slightly above the August rate.  If you remove these two categories, as they tend to be affected by either prices (the data are not price-adjusted) or temporary factors, third quarter sales grew at a robust seven percent annualized pace from the second quarter.  And that points out what I always point out: One month’s data don’t necessarily give a good picture of the trend.

On the housing front, the National Association of Home Builders’ Index popped in October.  It hits its highest level in nearly two years. All three components, present conditions, future sales and traffic, were up solidly.  There was one concern in the report: Not all regions are seeing an uptick in activity.  In the West, conditions soared, while they were better in the South.  But the Northeast and Midwest had declines in their overall indices.

MARKETS AND FED POLICY IMPLICATIONS: While it may be clear that consumer spending is slowing, it is not clear the extent to which that is happening.  Just looking at September’s numbers gives the impression that the canary is starting to keel over.  But adjusting for volatility in the data doesn’t confirm that trend.  Consumers are still spending fairly decently, though as is abundantly clear, at a somewhat slower pace than they had been.  We are looking at a moderation not a collapse in demand and that is why third quarter growth will likely come in at roughly two percent.  That said, the outlook is for further deceleration in household spending.  With job growth, wage gains and hours worked easing back, the gains in income needed sustain strong consumption are just not there.  The headline should give investors pause, but they are still focused on the China trade talks.  While a deal was supposed to have been agreed to, it is unclear when or if a mini-agreement will be signed.  So don’t unbuckle those seat belts just yet.