West News Wire: Retail sales in the United States decreased more than anticipated in December, with losses in purchases of cars and various other commodities being the main contributors. This puts consumer spending and the economy as a whole on a poorer growth path going into 2023.
Together with declining inflation, the significant sales declines revealed by the US Department of Commerce on Wednesday are likely to push the Federal Reserve to slow down the rate of interest rate hikes even more starting next month. Since the 1980s, the US central bank has increased interest rates at its quickest rate.
In a period of economic uncertainty, customers are likely cutting back on purchases, according to Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “The trajectory for the US economy is weakening and recession risks are rising for 2023.”
Retail sales fell 1.1 percent last month. Data for November was revised to show sales dropping 1 percent instead of 0.6 percent as previously reported. It was the second straight monthly decline. Economists polled by Reuters had forecast sales decreasing 0.8 percent. Retail sales rose 6 percent 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 prices for gasoline or petrol, which impacted receipts at service stations.
In addition, spending is shifting back to services.
Sales at auto dealers fell 1.2 percent. Receipts at service stations tumbled 4.6 percent. Online retail sales dropped 1.1 percent. Furniture stores sales plummeted 2.5 percent. Receipts at food services and drinking places, the only services category in the retail sales report, fell 0.9 percent.
Electronics and appliance store sales declined 1.1 percent. Clothing store sales fell 0.3 percent. There were also decreases in receipts at general merchandise stores.
But sales at sporting goods, hobby, musical instrument and bookstores edged up 0.1 percent. Receipts at building material and garden equipment suppliers rose 0.3 percent.
The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25 percent 4.5 percent 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, petrol, building materials and food services, retail sales fell 0.7 percent last month. Data for November was unrevised to show these so-called core retail sales sliding 0.2 percent 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 percent in October and being unchanged in November, economists believe growth in overall consumer spending in the fourth quarter would exceed the 2.3 percent annualized rate logged in the third quarter.
Gross domestic product growth estimates for the October-December quarter are as high as a 4.1 percent rate, also reflecting the sharpest contraction in the trade deficit in November since early 2009. The economy grew at a 3.2 percent 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 US Department of Labor on Wednesday showed the producer price index (PPI) for final demand decreased 0.5 percent in December after rising 0.2 percent in November.
In the 12 months through December, the PPI increased 6.2 percent after climbing 7.3 percent in November. Economists had forecast the PPI dipping 0.1 percent on the month and gaining 6.8 percent year-on-year.
The study was released shortly after news broke last week that monthly consumer prices dropped in December for the first time in more than two and a half years.
The decrease in the PPI was caused by a 1.6% drop in the cost of goods. A 7.9 percent decline in energy prices and a 1.2 percent decline in food prices dragged down goods, which increased by 0.1 percent in November.
After increasing 0.2 percent in November, the price of services increased by 0.1 percent.
Producer prices increased by 0.1 percent in December when volatile components including food, energy, and trade services were excluded. The core PPI increased by 0.3% in November.
The core PPI increased by 4.6 percent in the 12 months that ended in December after rising by 4.9 percent in November.