The downward trend in retail sales

The Commerce Department reported that retail sales in June posted their steepest month-to-month decline in almost two years, plunging 0.9 percent overall, after increasing an upwardly revised 1.5 percent in May.

Automobile and parts sales, accounting for roughly 20 percent of overall retail sales, fell by 2.9 percent in June after increasing 1.1 percent in May. Excluding autos, overall retail sales declined 0.4 percent.

In a continuing sign of the long and drawn-out impact of the housing market slowdown on consumer spending, sales at both furniture and home improvement stores continued to tumble.

Furniture and home furnishing sales fell 3.0 percent in June after being flat for most of the year. As furniture sales are correlated with new home construction, further declines from the lofty increases of 2004 and 2005 should be expected as the housing slowdown continues. In the chart below, 2006 appears to be a year of transition and, like housing, the trend for 2007 is decidedly down.

Home furnishings account for roughly 2.5 percent of overall retail sales - the much bigger housing related component is in the home improvement area that contributes almost ten percent.

Building material and garden supply sales slid 2.3 percent in June after surging 4.7 percent in May. Here too, after coming off of lofty gains in 2004 and 2005, last year looks like a year of relative moderation followed by some wild swings in 2007, but overall a downward trend.

The other major categories of retail sales - food and beverages at about 13 percent and general merchandise at about 12 percent - have shown modest gains in recent months.

The impact of the housing market on home improvement sales is something that many will be watching in the months ahead. After a profit warning from Home Depot earlier in the week, this sector is likely to come under increasing pressure as more and more homeowners tighten their belts amid an increasing volume of news stories about foreclosures and falling home prices.

As evidenced by recent surveys, your typical homeowner sees home prices stable or continuing to rise in the year or two ahead, feeling no less wealthy than they did at the height of the housing market mania a few years ago. As this perception slowly changes, home-related retail sales are likely to continue to slide.

Full Disclosure: No position in Home Depot at time of writing.