The spreading of the credit crisis in recent weeks is expected to restrain the animal spirits of the US consumer when the monthly retail sales data is released tomorrow. Reuters survey has a median forecast for a 0.7% decline in September sales while a decline of 0.3% is seen excluding autos.
Conventional wisdom is that the turmoil on Wall Street will quickly spill over to Main Street. It’s hard to argue, as people do tend to gauge the economy by the level of the DJIA. After scary slides in recent weeks, the consumer could turn quite cautious. Add rising unemployment and bloated real estate inventories and it adds up to a tough time for retailers in the months ahead. The one bright spot is the sharp drop in energy costs which could help offset some of the macro economic weakness on individual consumer behavior.
What does this mean for the dollar? It’s tough to say. Markets have priced in a sharp recession, so the near-term direction of stocks and the state of the credit markets probably matter more in the next few days than the state of the real economy. Improved stocks will tend to work against the dollar while turmoil will support it.
