Retail sales fell 1.2% in December, deeply disappointing expectations for a modest 0.1% gain. What’s more, the prior two months of data were revised down 0.1 p.p. each to 1.0% for October and 0.1% in November. The December drop erased the prior two months of gains, bringing the level of sales back below the September level.
Given a drop in fuel prices, receipts at gasoline stations fell a hefty 5.1% on the month, while sales at eating and drinking establishments also dropped 0.7%, both weighing on the headline.
On the other hand, sales at autos & auto parts dealers and building materials stores, which rose 1.0% and 0.3% m/m respectively, provided some support.
Excluding the above volatile categories (gas, autos, building materials, and food services), the so-called ‘control group’ used in calculating GDP fared even worse. It fell 1.7% on the month, disappointing market expectations for a 0.4% gain. Delving into the details, all of the categories under the control group fell on the month, with pullbacks ranging from 0.1% at electronics & appliance stores to 4.9% at sporting goods stores. Factoring in mixed revisions to the prior two months of data, sales in the control group lost steam at the end of the year, but still grew by 1.8% ann. in the fourth quarter.
Key Implications
December’s delayed retail report shows that good things do not always come to those who wait. It appears that the sharp stock market selloff, coupled with uncertainty related to trade tensions with China and a late-year government shutdown, prompted American consumers to keep a tighter grip on their wallets. Between downward revisions to the prior months’ data and December marking the steepest monthly drop in sales since September 2009, it’s hard to find a silver lining in today’s report.
Consumer spending in the fourth quarter is now tracking around 2.6%, still a pretty good showing, but weaker than we previously expected. December also provides a weak handoff to 2019. The fact that the government shutdown dragged on until late January and consumer confidence fell on the month, further reinforces a soft quarter for consumer spending at just below 1.5% annualized. Similar to last year, however, we don’t expect the first-quarter performance to set the pace for the rest of the year. Provided that we see no major disruption on the trade front or another government shutdown, a resilient labor market should shore up spending, with consumption expected to rebound in the second quarter.
