Rebound in retail sales due to better car inventories

Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.

Bottom line

Retail sales increased more than expected in September, and the preliminary estimate suggests that sales were also robust in October. However, the details indicate that most of the strength is due to more robust motor vehicle sales, as the unclogging of the supply chain is improving inventories at dealers, allowing them to satisfy the pent-up demand. This situation may prove temporary, especially considering broad-based cautious spending in other categories.

Despite strong retail sales in September, retail sales volume declined in the third quarter, suggesting very weak consumer spending in the upcoming GDP. Nevertheless, strong sales in October (and September) will provide a positive starting point for consumer spending in the fourth quarter.

Nevertheless, consumers remain cautious. As such, we estimate that retail sales adjusted for inflation and population growth were down (-1.0% y-o-y) in September, while core retail sales were down (-2.7% y-o-y). All provinces are estimated to have seen a decline in core spending per capita adjusted for inflation, suggesting that individual households are reducing their spending.

There are some regional divergences. At one end, consumer spending in Alberta, PEI, Nova Scotia and New Brunswick remains strong, even once adjusted for population growth, while it is weak in Saskatchewan, Ontario, and BC. There is a correlation between the strength in consumer spending and indebtedness, with more robust sales in provinces with lower indebtedness (Atlantic provinces). In contrast, consumer spending underperforms in provinces with higher debt levels (Ontario and BC).

The outlook for retail sales and consumer spending more broadly remains tilted to the downside as consumers continue to face an erosion in purchasing power due to high inflation and rising interest rates. The resilience in the labour market so far is likely a source of support to household spending. A weakening of the labour market, especially job losses, could lead to significant underperformance in consumer spending and the economy more broadly (see Will it be a hard landing or a soft landing? The labour market will decide).

Retail sales rose 0.6% m-o-m in September. Compared to the same month last year, retail sales increased 2.7% y-o-y. Statistics Canada also reports that retail sales are estimated to have jumped higher by 0.8% m-o-m in October based on a preliminary estimate. It would be the biggest monthly increase since the beginning of 2023 if confirmed.

Monthly sales were higher in only 4 out of 9 subsectors. The increase in the month was spending at gasoline stations (+3.2% m-o-m), motor vehicle and parts dealers (+1.5% m-o-m), building material and garden centers (+0.5% m-o-m), and general merchandise stores (+0.3% m-o-m). These higher sales were partly offset by lower spending at sporting goods, hobby, and books stores (-1.6% m-o-m), clothing, footwear and accessories stores (-1.0% m-o-m), and food and beverage retailers (-0.4% m-o-m).

Core retail sales, which excludes motor vehicles and parts and gasoline stations, were 0.3% m-o-m lower (+1.7% y-o-y). The focus on core retail sales is important in the current context, as changes in gasoline prices are leading to volatile sales at gasoline stations, and better motor vehicle inventories are helping satisfy pent-up demand in the sector.

In volume terms (i.e. adjusted for inflation), retail sales were up by 0.3% in September (+1.5% y-o-y). Core retail sales are estimated to have decreased by 0.5% on the month (-0.1% y-o-y).

There are some important divergences by provinces. Focusing on the y-o-y changes, the value of retail sales increased the most in PEI (+10.2% y-o-y), Quebec (+5.9% y-o-y), Nova Scotia (+5.2% y-o-y), and New Brunswick (+4.6% y-o-y). On the flip side, it rose the least in Newfoundland (+0.3% y-o-y), BC (+0.9% y-o-y), Ontario (+0.9% y-o-y), and Saskatchewan (+1.3% y-o-y).

Looking at the value of core retail sales, we estimate they increased the most in Nova Scotia (+6.1% y-o-y), Alberta (+6.0% y-o-y), New Brunswick (+5.2% y-o-y), and PEI (+4.6% y-o-y). Core spending decreased in Ontario (-0.2$ y-o-y) and rose the least in BC (+0.1% y-o-y), Saskatchewan (+2.1% y-o-y), and Quebec (+2.5% y-o-y).

In Alberta, retail sales rose 0.9% m-o-m in September (+4.3% y-o-y). The increase in headline retail sales was mainly driven by food stores and general merchandise stores, while sales at motor vehicles stores declined. As a result, we estimate that core retail sales rose by 3.4% m-o-m (+6.0% y-o-y) in September. Although there are no official volume details at the provincial level, we estimate that retail sales volumes in the province increased by 3.1% m-o-m (+3.2% y-o-y).

Statistics Canada also releases retail sales numbers for Calgary and Edmonton. The data shows some convergences between regions. As such, retail sales in Calgary rose by 3.4% y-o-y in September, while it increased 3.4% y-o-y in Edmonton and by 6.1% y-o-y in the rest of the province. The core measure also showed that spending increased at the same pace across the province, with +6.0% y-o-y in Calgary, +6.0% y-o-y for Edmonton and 6.1% y-o-y for the rest of the province.