If the U.S. economy has a hero in 2019, it’s the American consumer. Amid a global slowdown and bearish forecasts of a U.S. recession, bulls have consistently pointed to robust consumer spending as a strong trend that can shore up further economic growth.
That may be changing. U.S. retail sales in September fell an unexpected 0.3% from the previous month to $526 billion, the Commerce Department said Wednesday. Contrast that with August’s 0.6% growth rate and July’s 0.7% rate. According to a survey from Reuters, economists had been expecting a 0.3% growth rate last month.
The report comes amid other worrying signs, such as a slowdown in manufacturing and weaker growth in the service sector. The drop in retail sales is especially worrisome because it may reveal a crack appearing in strongest and most resilient part of the American economy’s foundation—and just in time for the holiday season.
“While this is by no means conclusive evidence that the consumer is wavering, it nonetheless reinforces our ongoing concern that a spending retrenchment will ultimately trigger a more durable slowdown,” BMO Capital Markets’ Ian Lyngen said in a research note.
Consumer spending makes up more than two thirds of the U.S. economy. In the second quarter, when the overall GDP grew by 2%, consumer expenditures increased by 3%, more than offsetting declines in corporate spending and net exports. If U.S. consumers are indeed trimming their household budgets, it could be bad news at a bad time for the overall economy.
The report also adds another cloud over the stock market as companies line up to report their third-quarter earnings. Major retailers were down early on Wednesday, lagging the overall market. Walmart closed down 0.1% at $119.42 a share. The Dow Jones Industrial Average, meanwhile, finished 0.08% lower at 27,001.98.
The biggest decline in September retail sales came in auto sales, the Commerce Department said. Other sectors such as online sales and building materials also declined, while electronics and furniture sales remained flat with the August numbers.
Awaiting the Fed’s Response
The 0.3% slowdown was nowhere near as large as the 2% drop last December, when a sharp, three-month selloff in the stock market led consumers to curtail retail spending. This time, however, there is no such warning sign in the stock market. The Dow is up 16% so far this year.
What’s more, that volatility in the stock market late in 2018 ended after the Federal Reserve assured the markets that it would resume interest rate cuts. After raising interest rates four times in 2018, the Fed has since changed course, trimming rates twice since last July.
It’s not clear that the Fed is prepared to keep cutting rates, which would have the effect of helping consumers by further lowering the interest rates on mortgages, car loans, and credit card balances. The Federal Open Market Committee last month indicated an eroding consensus around its recent inclination to lower the fed funds rate.
On Wednesday, Chicago Fed president Charles Evans, an influential voice on the FOMC who has taken a dovish stance lately, indicated the Fed may be done raising interest rates not just for the rest of this year, but throughout 2020 as well.
“I think policy probably is in a good place right now,” Evans said in speech in Peoria, Illinois. “In September the median FOMC participant saw no additional change in the target range for the federal funds rate through the end of 2020 and one 25-basis-point increase in each of 2021 and 2022. My own assessment is pretty much in line with this median outlook.”
That position is notable because it stands in contrast with expectations among financial market investors. Earlier this week, the CME FedWatch tool, which tracks trading activity in Fed fund futures, indicated a 67% chance that the Fed would cut interest rates when it meets on Oct. 30. After today’s retail sales report, it now sets the likelihood at 89%.
Another wild card for consumers is the ever-shifting U.S. trade policy. Consumer confidence fell to a three-year low in August when the U.S.-China trade war threatened to escalate enough to raise prices on many consumer goods, then rebounded in September as tensions eased. Still, an index measuring confidence remains 2.6% below where it was a year ago.
Investors are taking Wednesday’s disappointing retail-sales figures in stride for now. More indicators will be coming out in the next few weeks to gauge the economy’s health. October consumer confidence will be released a week from Friday. And third-quarter earnings reports from retailers and other consumer-dependent companies are also due. Those may help show whether today’s report is an aberration, or a sign of things to come.
More must-read stories from Fortune:
—Trump’s tax bill has cost homeowners a trillion dollars
—Inside JP Morgan, moving on from WeWork is proving to be a messy proposition
—What is Oyo? Behind Softbank’s latest high-growth, high-valuation bet
—Why the next recession may feel very different than 2008
—Trump’s tariffs were supposed to ding China, but the U.S. economy is getting hit 2.5x harder
Don’t miss the daily Term Sheet, Fortune’s newsletter on deals and dealmakers.
