A sign of hope in a soot-soaked retail sales report
Analysts had high expectations for December retail sales. However, the results were disappointing.
The Census Bureau announced on Tuesday that retail sales for December showed no growth. This was significantly lower than the anticipated 0.4% increase and a setback compared to November’s solid gain of 0.6%.
There are two contrasting perspectives on this. Some optimists believe that holiday shopping occurred earlier this year, meaning consumers had fewer items left to buy in December. Conversely, the pessimists feel that consumers may have simply lost their shopping momentum, reflecting a deeply low consumer sentiment, which was noted by a recent report from the University of Michigan.
But, were the figures really that grim? It’s important to note that the key numbers for month-to-month retail sales are seasonally adjusted. In December, these adjustments can be quite substantial.
Looking purely at the numbers without adjustments, total retail and food service sales actually rose by 10.9% from November to December, outpacing last year’s 8.8% increase during the same period. Unadjusted sales in December also grew by 3.8% compared to the previous year, with October showing a 3.5% increase and November at 1.9%.
Of course, there’s a reason for the seasonal adjustments—retail activity typically surges in December. This year, it didn’t quite reach the highs analysts expected.
Another viewpoint considers unadjusted year-over-year figures, which show a 3.7% increase in retail sales compared to last year. If you exclude gas stations, the sales grew by 4.2%.
So, while headlines might suggest that the holiday season was underwhelming, that seems a bit exaggerated. Overall in the fourth quarter, unadjusted sales rose by around 3.1% compared to the previous year, which indicates reasonable, though not extraordinary, growth during the holiday shopping season.
Bank of America data suggested that total retail spending in December saw a mere 0.7% year-over-year increase, with households spending 1.8% more. Their data also aligns with trends that traditional retailers have faced for years: online spending climbed by 6.7% year-over-year, while in-store sales dipped by 1.9%.
Real retail sales increase
This figure, however, does not account for inflation. Analyzing this accurately is trickier than it appears. Much of the conversation around “actual retail sales” incorrectly relies on the wrong deflator. Retail sales primarily concern physical products, while the consumer price index (CPI) encompasses services inflation, especially regarding housing and related sectors that don’t actually contribute to retail sales. If both consumer price trends were aligned, this wouldn’t be an issue. But in an environment where service inflation is high and goods inflation is relatively low, this can distort retail performance.
In December, while the CPI for all items rose by 2.7% year-over-year, the core CPI for primary goods increased by only 1.7%. The rate of increase for goods, when excluding food and energy, was just 1.4%. This situation suggests that using a services-focused CPI may misrepresent actual retail volume strength. If a core goods price index is used, the nominal increase translates into positive real growth rather than a drop. If we apply a deflator of 1.7, real sales for December would show a 2% year-over-year increase. So, while it’s not an explosive month, it still demonstrates healthy growth.
What makes the December retail story intriguing is the inflation aspect. The flat month-on-month rate in December aligns more with a cooling of inflation rather than a resurgence. Analyzing previous years since 2000, there were only two instances where a flat December led to an increase in headline CPI inflation the following year, excluding the significant outliers of 2008 and 2020. In years when December sales grew significantly, inflation typically accelerated more often.
The reasoning is quite straightforward: weak demand at year-end usually leads to limited pricing power as the new year begins. Deep price cuts in January, reduced inventory projections, and intensified competition to sell goods frequently emerge as immediate consequences. This scenario can influence commodity prices and, subsequently, broader inflation trends over the year.
An additional consideration is demographic factors. Research from the Dallas Fed and others indicates that the economy’s necessary job growth has diminished alongside slower population growth, a trend that has intensified in the past year with tighter immigration rules. This shift can also affect retail sales data. With fewer new households contributing to consumer spending, aggregate spending may appear weaker, even if individual household spending remains robust. Analysts should keep this in mind when interpreting monthly retail statistics.
Still, this may not offer much comfort for investors. They tend to care less about the reasons behind slower sales growth; low sales are simply viewed as low sales. However, it’s crucial for assessing the health of U.S. consumers rather than just looking at overall demand.
