January retail sales showed that consumer spending bounced back a bit in January, but not enough to offset a December that was in some ways the worst on record. Q1 consumer spending growth will likely be below 2%.

It Was the Best of Times, It Was the Worst of Times

After 2018 ended with a thud, retailers cleaned up the holiday displays and pushed forward into the new year. We already knew going into today’s report for January retail sales that the prior month’s report was ugly. In revisions today, we learned that December 2018 was, at least in some respects, the worst on record. There was clearly a bounce in January, but not enough to completely alleviate concerns about the ability of the consumer to drive growth in a meaningful way in 2019.

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Headline retail sales edged up just 0.2% after a 1.6% decline in the prior month (revised down from the 1.2% decline as first reported). The December drop in retail sales was the worst since 2009, and other details were worse. Control group retail sales strips away food, autos, gas and building materials and serves as a good proxy for personal consumption in the GDP report. The 2.3% drop in December control group sales was the largest decline since 2000. That would be alarming were it not for the significant 1.1% rebound for this category in January, an increase that matched the largest increase since February 2014.

What the Heck Happened in December?

So why was December so awful for retail sales? There was no obvious culprit from a store category standpoint. There were broad declines in most categories up to and including online retailers, which have been known to swim against the stream and post a gain even in months where brick and mortar stores struggled. Non-store retailers, as they are called in the report, fell 5.0% in December—the worst month for online sales since January 2001 and the worst December on record.

The stock market was exceptionally volatile in December and Christmas week in particular was characterized by steep sell-offs. While these declines have been largely retraced after a solid start to 2019 in financial markets, the impact on household psyche during a key period for shopping likely played a role. Official numbers on household wealth released last week put a spotlight on the hit to net worth and the relationship this measure has had over time with personal spending.

Triumph or Disaster?

In consecutive months control group retail sales posted both the biggest drop in 19 years and then tied the biggest increase of the expansion. Rudyard Kipling advised meeting with triumph and disaster and treating those two imposters just the same. That is the approach we take on these choppy readings from retail sales. The stock market swoon last year was a big hit to household wealth, but the rebound more recently assuages that somewhat. First quarter spending is dented. We are likely looking at a 1 %-handle on real PCE growth. But in our view this is not the beginning of a serious retrenchment in which consumers go into hiding.

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