This does come as a bit of a surprise, especially since other economic indicators of late had looked positive:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $411.6 billion, a decrease of 0.3 percent (±0.5%)* from the previous month, but 3.8 percent (±0.7%) above October 2011.  Total sales for the August through October 2012 period were up 4.7 percent (±0.5%) from the same period a year ago.  The August to September 2012 percent change was revised from 1.1 percent (±0.5%) to 1.3 percent (±0.2%).

Retail trade sales were down 0.3 percent (±0.5%)* from September 2012, but 3.8 percent (±0.8%) above last year. Gasoline stations sales were up 7.7 percent (±1.7%) from October 2011 and nonstore retailers were up 7.2 percent (±3.0%) from last year.

Other economic indicators released this month showed some progress:

• September construction put in place rose 0.6%
• September manufacturers shipments rose 4.8%
• September trade deficit dropped 5.1%, exports rose 3.1%, imports rose 1.5%
• September wholesale sales rose 2.0%

All of that applied to last quarter’s growth figure, though, the advance estimate of which was still an anemic 2.0%.  The retail sales figure in October gives us our first look at fourth-quarter economic performance, which isn’t terribly optimistic.  Reuters notes that the impact of Hurricane Sandy has to be taken into account — but in what direction?

U.S. retail sales fell in October for the first time in three months as super storm Sandy slammed the brakes on automobile purchases, suggesting a loss of momentum in spending early in the fourth quarter.

Sales dipped 0.3 percent, the Commerce Department said on Wednesday, after an upwardly revised 1.3 percent increase in September that was previously reported as a 1.1 percent rise.

Economists polled by Reuters had expected retail sales to fall 0.2 percent. The decline partly reflected the impact from super storm Sandy, which lashed the densely populated East Coast — holding down auto sales.

The Commerce Department said it had received indications from companies that the storm had both positive and negative effects on October’s sales data.

The hurricane only made landfall in the final couple of days of the month, however.  Auto retailers expressed optimism that demand would shift to November, and that the massive destruction would prompt a spike in replacement sales:

They expect auto sales to rebound in November. Automakers and dealers last week estimated that as many as a quarter million vehicles would end up in the scrap yard because of the storm.

True, but that only shifts spending from one sector to another.  The Christmas season is almost upon us, where retailers expect to make 20% of all their annual revenue, and the need to replace destroyed assets might mean depressed sales in other retail areas, especially in the northeast. Even without the auto sales drop, retail sales figures were flat in October, which is a signal of dropping consumer confidence.

Zero Hedge says that decline would be coming anyway:

Ignoring for a second that the Commerce Department said that Hurricane Sandy had both positive (remember those massive lines in various stores ahead of Sandy) and negative impacts on retail sales, it would be truly inconceivable for the sellside Wall Street consensus of diploma’ed PhDs, which knew about Sandy’s impact on retail sales well in advance, and thus could adjust its numbers, to actually, you know, adjust its numbers. Either way there is no way to spin the longer term major store sales trend (last chart), which shows that the US consumer, out of money, out of credit, and out of savings is entering the holiday season with little to zero disposable spending power.

We’ll soon see, as the shopping season starts in earnest in just nine days.  As ZH’s chart from Bloomberg shows, retail sales at major stores have been slowing for a few months even before Hurricane Sandy.  With the uncertain tax situation for 2013 and the move by some employers to cut hours to avoid the costs of ObamaCare, I’d expect consumers to be cautious this year.  It’s one reason a fiscal-cliff deal would be better sooner rather than later.