OTTAWA - Canadian consumers went into hibernation in July as the value of retail sales fell a stunning 0.6 per cent from the previous month, defying all expectations of a strong pick-up.

The result appeared to fly in the face of other evidence that the Canadian economy is steadily picking up steam from a year-long slide and it left economists scratching their heads.

They had predicted a 0.7-per-cent increase in retail sales for the month of July, some believing it could even beat June's full one-per-cent advance.

"A horrible report. There's no other way to put it other than we all (economists) have egg on our faces," said Derek Holt, a senior analyst with Scotiabank.

"I honestly don't know. It's either the release of pent-up demand among consumers is over and done for, or poor weather, or it was a pause after a couple of months or strength, or it's the lag effect of job losses catching up."

Holt and other economists noted that the number was not as bad as it looked on the surface, given that the volume of sales only dropped 0.1 per cent.

For example, July saw consumers buying 5.3 per cent more autos than in June, but a large portion of those sales involved lower-prices vehicles. As well, the value of July's sales were hammered by a 3.4-per-cent decline in prices at service stations, mostly lower prices for gasoline.

"July's retail sales report was certainly disappointing, but falling prices made the headline look overly weak," explained economist Benjamin Reitzes of BMO Capital Markets.

The stock markets barely, noticed. The Toronto exchange index was up over 100 points in early morning trading Tuesday, and the Canadian dollar, which had been up about one cent in overnight trading, lost only about one-third of that gain as the data became known at 8:30 a.m. ET. At mid-morning it was still up 0.67 cents over Monday's close at 93.48 cents US.

The weaker-than-expected sales results were not confined to merely autos and gas, however. Statistics Canada noted that sales dropped in five of eight categories, bringing the total value of retail sales down to $34.2 billion.

Food-and-beverage stores posted a 1.5 per cent sales decline; furniture, home furnishings and electronics stores fell 0.6 per cent; supermarket sales slid 1.6 per cent and sales at beer, wine and liquor stores dipped 1.4 per cent.

The largest increase was a 1.1 per cent rise in sales at pharmacies and personal-care stores. As well, a one per cent increase at building and outdoor home supplies stores more than offset a decrease in June.

Economists noted that despite July's setback, sales have advanced in five of the last seven months and other components of growth were surprisingly positive in July, including manufacturing and wholesale trade.

The Royal Bank said in a research note that the performance of retail sales continues to point to a mild recovery by historical standards. However, it also shows that despite general improved conditions, there is still a need for the Bank of Canada to maintain a stimulative monetary stance.

Meanwhile, Calgary-based national sporting goods retailer Forzani (TSX:FGL) said Tuesday that this year's back-to-school period got off to a weak start but the company ended up with slightly higher sales volumes than last year.

Forzani has more than 550 corporate and franchise stores under the Sport Chek, Athletes World, Nevada Bob's Golf and other banners.

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