U.S. retail sales tumble in December; monthly producer prices fall

U.S. retail sales fell more than expected in December, pulled down by declines in purchases of motor vehicles and a range of other goods, putting consumer spending and the overall economy on a weaker growth path heading into 2023.

The broad drop in sales reported by the Commerce Department on Wednesday, together with subsiding inflation, are likely to encourage the Federal Reserve to further scale back the pace of its interest rate increases next month. The U.S. central bank is engaged in its fastest rate hiking cycle since the 1980s.

“Weak retail sales in December show consumers are likely retrenching during a time of economic uncertainty,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, N.C. “The trajectory for the U.S. economy is weakening and recession risks are rising for 2023.”

Retail sales fell 1.1 per cent last month. Data for November was revised to show sales dropping 1.0 per cent instead of 0.6 per cent as previously reported. It was the second straight monthly decline. Economists polled by Reuters had forecast sales decreasing 0.8 per cent. Retail sales rose 6.0 per cent year-on-year in December.

Retail sales are mostly goods and are not adjusted for inflation. December’s decline in sales was likely in part the result of goods prices falling during the month. Holiday shopping was also pulled forward into October as inflation-weary consumers took advantage of discounts offered by retailers.

Higher borrowing costs as the Federal Reserve battles inflation are also weighing on retail sales as goods tend to be financed on credit. Retail sales were also likely hurt by a cold snap in December as well as lower gasoline prices, which impacted on receipts at service stations.

In addition, spending is shifting back to services.

Sales at auto dealers fell 1.2 per cent. Receipts at service stations tumbled 4.6 per cent. Online retail sales dropped 1.1 per cent. Furniture stores sales plummeted 2.5 per cent. Receipts at food services and drinking places, the only services category in the retail sales report, fell 0.9 per cent.

Electronics and appliance store sales declined 1.1 per cent. Clothing stores sales fell 0.3 per cent. There were also decreases in receipts at general merchandise stores.

But sales at sporting goods, hobby, musical instrument and book stores edged up 0.1 per cent. Receipts at building material and garden equipment suppliers rose 0.3 per cent.

The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25 per cent-4.50 per cent range, the highest since late 2007. In December, it projected at least an additional 75 basis points of hikes in borrowing costs by the end of 2023.

Excluding automobiles, gasoline, building materials and food services, retail sales fell 0.7 per cent last month. Data for November was unrevised to show these so-called core retail sales sliding 0.2 per cent as previously reported.

Core retail sales correspond most closely with the consumer spending component of gross domestic product. The weakness in core retail sales is likely to be offset by anticipated gains in services spending. Consumer spending continues to be underpinned by labour market tightness, which is keeping wages elevated.

With inflation adjusted consumer spending increasing 0.5 per cent in October and being unchanged in November, economists believe growth in overall consumer spending in the fourth quarter would exceed the 2.3 per cent annualized rate logged in the third quarter.

Gross domestic product growth estimates for the October-December quarter are as high as a 4.1-per-cent rate, also reflecting the sharpest contraction in the trade deficit in November since early 2009. The economy grew at a 3.2 per cent rate in the third quarter.

Nevertheless, consumer spending and the overall economy are entering 2023 with less momentum. Savings are also dwindling.

Most economists expect the economy will slip into recession by the second half of the year, though there is cautious hope that moderating inflation could discourage the Fed from raising interest rates significantly higher. This would result in growth only slowing sharply rather than the economy contracting.

News on inflation continued to be encouraging. A separate report from the Labour Department on Wednesday showed the producer price index for final demand decreased 0.5 per cent in December after rising 0.2 per cent in November.

In the 12 months through December, the PPI increased 6.2 per cent after climbing 7.3 per cent in November. Economists had forecast the PPI dipping 0.1 per cent on the month and gaining 6.8 per cent year-on-year.

The report came on the heels of reports last week that monthly consumer prices fell for the first time in more than 2½ years in December.

A 1.6-per-cent decline in the prices of goods accounted for the drop in the PPI. Goods, which gained 0.1 per cent in November, were pulled down by a 7.9-per-cent plunge in energy and a 1.2-per-cent drop in food prices.

Services prices edged up 0.1 per cent after rising 0.2 per cent in November.

Excluding the volatile food, energy and trade services components, producer prices gained 0.1 per cent in December. The core PPI advanced 0.3 per cent in November.

In the 12 months through December, the core PPI rose 4.6 per cent after increasing 4.9 per cent in November.