American consumers are cutting back

NEW YORK (CNNMoney.com) -- After months of speculation about how long American consumers can stay resilient to housing and credit woes, economists said Friday that last month's retail sales weakness shows households are rethinking their spending habits.

The Commerce Department reported that total retail sales last month rose 0.3 percent, short of economists' forecasts of a 0.5 percent rise. Stripping out volatile auto sales, retail sales actually fell 0.4 percent versus forecasts of a 0.2 percent increase.

The numbers fueled worries that American consumers are feeling the pressure of an ongoing slump in the housing market, mortgage turmoil and also higher energy costs.

"This [August report] is not a disaster but it was unexpected. What matters now is the extent of any fall rebound," Ian Shepherdson, chief U.S. Economist with High Frequency Economics, wrote in a report Friday. "We expect a clearly slowing trend. Lower confidence and the accelerating housing collapse will hurt."

Compounding that concern, a new survey of American consumers from RBC Capital Markets on Friday said subprime worries, softening job markets, rising gas prices and an unstable stock market have taken a toll on consumer sentiment.

This was the result of the monthly RBC CASH (consumer attitudes and spending by household) Index, which measured the attitudes of 1,000 Americans polled from Sept. 10 to 12.

The report said the overall RBC CASH Index stands at 71.1 for September, down more than 18 points from August's 89.3 level and the lowest level in 16 months.

"The magnitude in the drop of consumer confidence is not surprising given the rocky economic ride consumers are experiencing," T.J. Marta, economic and fixed income strategist for RBC Capital Markets, said in the report.

"Americans have a dim view of their current financial situation and an even bleaker view of their future prospects," he said. "Although some of the factors weighing on consumers could dissipate in coming weeks, the decline in confidence is consistent with our view that U.S. economic growth will moderate through the remainder of the year."

While the August numbers were weak, the government also revised July's retail sales higher, helping to mitigate some of the disappointment.

"The upward revisions in July helps to balance out the negative tone to August's numbers," said Michael Niemira, chief economist with the International Council of Shopping Centers (ICSC).

"While last month's picture is troubling, when you strip out the volatile components of gas and building materials, the best case scenario is that consumer demand is weakening but it still showed a modest increase," he said.

For now, Niemira said strong income growth was helping to prop up consumer spending. To that end, many large chain stores including Wal-Mart (Charts, Fortune 500), Target (Charts, Fortune 500) and Nordstrom (Charts, Fortune 500) logged better-than-expected same-store sales in August.

The Commerce Department report showed that building materials and gasoline station sales were among the biggest drags to overall sales growth last month.

Gas station sales declined 2.4 percent while sales of building materials sales fell 1 percent. But excluding those two categories, core retail sales actually rose 0.1 percent.

Clothing sales dipped 0.1 percent in August while sales at department stores fell 0.2 percent. Grocery store sales slipped 0.2 percent.

That said, auto sales posted a strong 2.8 percent increase in August, and furniture and electronics purchases also saw modest increases.

At the same time, Niemira fears that retail sales growth will trend lower in the months ahead due to a weakening macroeconomic environment.

Any pullback in consumer spending immediately raises a red flag for the broader economy since consumer spending accounts for two-thirds of the nation's economic growth.

What's more, if Americans curtail their spending further in the weeks ahead, it could threaten the upcoming holiday sales season which accounts for as much as 50 percent of retailers' annual profits and sales.

If the subprime mortgage meltdown makes creditors tighten their lending standards across the board, including consumer loans, the real concern for retailers is that both low-to-middle income shoppers will start to pull back.

"Consumers will ask 'how aggressive do I want to be with my spending," said Nigel Gault, U.S. economist with forecasting firm Global Insight.

"There's good reason for spending to pull back in the months ahead. It won't provoke a recession because the job market is holding up and real wages are up," Gault said.

Still, if nervous consumers start saving more of their wages and spending less then "I think the holiday season will most likely be a subdued one," he said.

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