US retailers reported better-than-expected August sales this week, surprising analysts who thought the deteriorating housing market and a credit crunch would put a bigger dent into consumer spending.

But the horizon might be getting tougher. On Friday, the government said U.S. employers cut 4,000 jobs last month — the first decline in four years.

And then there’s the thing about those ARMs.

JP Morgan analyst Charles Grom notes that the resetting of interest rates for adjustable rate mortgages could be a big drag on consumer spending going forward:
 
“With consumer spending clearly slowing, it’s apparent that the reset of adjustable rate mortgages is a leading contributor. In August, approximately $58 billion of ARM mortgages reset - the highest level (year to date). Of concern, looking ahead, ARM resets will augment significantly to a peak of $110 billion in March 2008 and won’t slow until (the second half) of 2008, which could lead to a significant increase in foreclosures and compound a weak housing market.”

That is not happy news for retailers whose earnings are already taking a hit from the housing market. Office Depot shares fell more than 10 percent on Friday after it warned that third and fourth quarter earnings would likely fall below year-ago levels as small business customers cut back on spending in response to the housing slowdown.