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U.S. retail sales in August declined unexpectedly, exhibiting a scenario where consumers remained cautious when it comes to spending. This raises doubts as to whether economic growth has somewhat tempered in the current quarter, at a time when things have just started to look up under the Trump administration with stock market scaling new highs. The dismal sales report came on the heels of the soft job addition last month and contraction in industrial output for the first time since January.

Analysts cited that back-to-back hurricanes — Harvey and Irma — disrupted activity, causing damage to homes, vehicles, commercial real estate and public infrastructure. Market experts asserted that while these hurricanes resulted in short-term derailment in the economic activity, a lift in the later part of the year remains on the cards with construction activities and business investments likely to steam up.

Given the prominent reasons on the table, the imminent hike in the benchmark interest rate looks very slim, when the Fed officials meet this week. However, decision over the pairing of $4.5 trillion portfolio of Treasury bonds and mortgage-backed securities in a phased manner could be taken.

Dismal Retail Sales

The Commerce Department stated that U.S. retail and food services sales in August declined 0.2% to $474.8 billion — following a revised reading of 0.3% growth registered in July — as people refrained from buying motor vehicles and spent less at clothing & clothing accessories  stores and electronics shops. However, retail sales increased 3.2% from August 2016.

The report suggests that sales at motor vehicles and parts dealers declined 1.6%. Sales at electronics & appliance stores dropped 0.7%, while at clothing shops the same dipped 1%. Meanwhile, furniture & home furnishing stores, grocery outlets and general merchandise shops witnessed sales growth of 0.4%, 0.3% and 0.2%, respectively. Sales at non-store retailers tumbled 1.1% but increased 8.4% from the prior-year period.

Bottom Line

The abovementioned data strongly suggests that consumer spending — accounting for over two-thirds of U.S. economic activity — lost momentum, which otherwise has been one of the pivotal factors driving the economy so far. The Fed will certainly consider the current retail sales report along with inflation data, labor market and other economic indicators, while arriving at any decision over the timing of the rate hike or winding up of balance sheet. The Fed raised the interest rate in June for the second time this year to a range of 1-1.25%.

Well nothing concrete can be said about the outcome of the meeting. Instead of finding an answer to this, it will be better to shift your focus on retail stocks that still hold promise. These are stocks backed with a Zacks Rank #1 (Strong Buy) – Zumiez Inc. (ZUMZ - Free Report) , Rush Enterprises, Inc. (RUSHA - Free Report) , Aaron's, Inc. (AAN - Free Report) , Abercrombie & Fitch Co. (ANF - Free Report) and Famous Dave's of America, Inc. (DAVE - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.

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