Retail sales are resisting a historic tendency to follow drops in home prices and sales, but whether consumers maintain spending levels hinges on which way the economy goes from here, according to one economist.

“As it stands today, retail sales growth has held up better than the falling housing market would otherwise indicate,” says Suzanne Mulvee, senior real estate economist at Property & Portfolio Research. “For some reason retail sales haven’t reacted to falling home prices yet. That’s probably because we have very low unemployment today, so people aren’t worried about losing their jobs.”

In previous economic cycles, retail sales have followed the ups and downs of the housing market with a lag time of about six months, according to Property & Portfolio Research. In the 1990s, for example, home sales plummeted from year-over-year growth of 20.2% in October 1994 to a year-over-year contraction of 16.5% in October 1995. The three-month moving average of retail sales reacted with a drop from a 7.3% growth in January 1995 to 3.7% growth in January 1996. Those retail sales numbers exclude fuel and automobile sales.

In the current market cycle, however, home and retail sales began to diverge in 2005, when home sales began to slow from a high point of 16.2% in December 2004. Retail sales took off about that time, climbing from 5.8% growth in December 2004 to peak at 8.6% growth in March 2006. Retail has slowed steadily since then but has remained in positive territory, and even rallied from a low of 4.1% in April this year to 4.4% in July.

That doesn’t mean retail is healthy — July’s sales growth of 4.4% is below the 5.6% monthly average for the industry since 1992, according to Property & Portfolio Research. “We’ve already gone below our historical average and I think we’ll stay below that average for the foreseeable future. The question is whether growth stalls further.”

Property & Portfolio Research isn’t forecasting a recession, though the company does expect GDP to slow to an annual rate of about 2%. Retail real estate could be more vulnerable than other sectors to an oversupply in the event of a recession, Mulvee says, due to the amount of new retail projects under construction, which will increase the national inventory by 2.5% to 145 million sq. ft. this year. Retail vacancy rates had already begun to creep up to 10.2% at midyear from 9.6% a year ago.

The nature of projects in the retail pipeline may reduce the risk of overbuilding, however, according to Hessam Nadji, managing director of research services at real estate firm Marcus & Millichap. That’s because 50% of planned retail projects are driven by big-box tenants, so a decision by those anchor retailers to forestall expansion plans will effectively halt the delivery of those projects. Only about 18% of planned retail projects are purely mixed-use or speculative, Nadji says.

“The degree of new construction is not alarming,” he says. “Up until now, we haven’t picked up on a serious pullback by retailers.” Marcus & Millichap expects some retail softening but is still projecting overall rental growth for the next 12 to 18 months.

How much longer will consumers continue to resist the dampening effects of the deflating housing market? Much depends on the consumer’s expectations. Right now, unemployment is at a six-year low of 4.6%, so most working Americans are feeling confident about their ability to remain employed and enjoy some wage growth.

A significant contributor to retail sales in the past two years derived from home equity. U.S. homeowners pulled a record $382 billion out of their homes in 2006, and much of that cash is still fueling consumption. “That is a windfall income that was probably big enough to translate into this year’s spending as well. That may be one of the reasons you’ve seen continued strength in the retail sector,” Mulvee says.

As slower retail sales growth since early 2006 suggests, funds from the home-equity cash machine are running out and retail sales may come closer in line with declining home sales next year. Further declines in spending might be averted if the Federal Reserve lowers interest rates, which could ease debt burdens on consumers and stimulate spending, and may even spur would-be homebuyers off the sidelines.

Otherwise, if the economy continues to slow and the credit crunch pushes up borrowing costs, retail sales will suffer. “Your decision to spend or not to spend can be made for you if you’re not able to pay your mortgage,” Mulvee says. “Spending levels will probably be determined by which way the economy goes in the next few months.”