U.S. Retail Sales Tumble in December as Supply Shortages Persist

U.S. retail sales dropped by the most in 10 months in December, likely the result of Americans starting their holiday shopping in October to avoid empty shelves at stores. Economists cautioned against reading the unexpected plunge in December retail sales reported by the Commerce Department as a sign of weakness. Consumer spending remains underpinned by huge savings, rising wages as companies scramble for scarce workers as well as soaring household wealth.

Still, the report and news of an unexpected decline in production at factories in December suggested the economy lost momentum at the end of 2021. That trend likely persisted into January amid spiralling COVID-19 infections, driven by the Omicron variant, which have disrupted businesses and schooling.

“It is clear that most shoppers heeded the advice to get holiday shopping done early and that, combined with a massive surge in goods spending earlier in the year, conspired to pull sales sharply lower to end the year,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “We do not view today’s drop in retail sales as a sign that consumer spending is coming unglued.”

Retail sales fell 1.9% in December, the largest decline since February 2021, after rising 0.2% in November. Economists polled by Reuters had forecast retail sales unchanged. Estimates ranged from as low as a drop of 2.0% to as high as a 0.8% increase.

Retail sales, which are mostly goods, increased 16.9% year-on-year in December. Unadjusted sales rose 10.0% last month after gaining 2.5% in November.

Bottlenecks in the supply chains caused by the pandemic have led to shortages of goods, including motor vehicles. The pulling forward of sales also likely impacted the so-called seasonal factor, the model that the government uses to strip out seasonal fluctuations from the data.

The online sales category was hardest hit by the drag from the seasonal factor, plunging 8.7%. Receipts at auto dealerships slipped 0.4% after rising 0.2% in November. Automobiles remain scarce because of a global semiconductor shortage.

Production at factories increased 0.6% in November. Economists had expected output to rise 0.5%.

Economists still expected the Fed to start raising interest rates in March, against the backdrop of high inflation. “The level of nominal and real goods spending remains elevated, and we do not think [January 14th]’s reading will have a significant impact on the Fed’s decision to liftoff rates, likely in March, which will depend more heavily on inflation than activity data,” said Andrew Hollenhorst, chief economist at Citigroup in New York. “The seasonal adjustment factor turns highly positive in January suggesting that online sales and overall retail sales will bounce back strongly.”

Stocks on Wall Street were lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

Sales at electronics and appliance stores dropped 2.9%. Receipts at service stations fell 0.7% as gasoline prices retreated from higher levels seen in the prior months. Sales at food and beverage stores fell 0.5%. Sales at clothing stores declined 3.1%. There were also declines is sales at sporting goods, hobby, musical instrument and book stores.

Furniture store sales tumbled 5.5%, while receipts at electronics and appliance stores plunged 2.9%. But sales at building material and garden equipment suppliers rose 0.9%.

Excluding automobiles, gasoline, building materials and food services, retail sales plunged 3.1%. Data for November was revised lower to show these so-called core retail sales falling 0.5% instead of dipping 0.1% as previously reported.

Core retail sales correspond most closely with the consumer spending component of gross domestic product. Though economists lowered their fourth-quarter consumer spending forecasts after the data, GDP growth estimates remained bullish, thanks to rising inventory accumulation. A third report from the Commerce Department showed business inventories increased a strong 1.3% in November.

“On net, we still see real GDP growth in the fourth quarter tracking close to our 7.0% rate forecast,” said Daniel Silver, an economist at JPMorgan in New York.

The economy grew at a 2.3% pace in the third quarter. Growth last year is expected to have been the strongest since 1984.

Supply Chain Issues Clog U.S. Online Holiday Sales Growth

U.S. consumer spending on online shopping during the holiday season was weaker than expected, Adobe Analytics data showed, as supply chain issues caused product shortages and delayed deliveries. Consumers spent a record $204.5-billion online over the 2021 holiday season, an increase of 8.6% from a year earlier, Adobe Analytics said in a new report. But the figure was lower than the $207-billion expected by Adobe and marked the smallest rise since the company started tracking holiday spending data in 2014. 

Congested ports, coronavirus-related factory closures in Asia and shortages of shipping containers and truck drivers shrank both global and U.S. holiday inventory by 2%, according to data from Salesforce. Adobe, which covers more than one trillion visits to U.S. retail websites in its analysis, said shoppers saw over 6 billion out-of-stock messages online, a more than threefold increase from pre-pandemic levels.

The holiday rush was also softened by early promotions that encouraged shoppers to splurge on everything from toys and video games to electronics outside of the biggest shopping days. For instance, during the Cyber Week – the period between Thanksgiving and Cyber Monday – consumer spending dropped 1.4%. “This holiday shopping season was the first time where big promotional moments like Cyber Monday and Black Friday took on less of the spotlight,” said Taylor Schreiner, senior director, Adobe Digital Insights.

Adobe’s data showed online prices rose 3.1% in December, marking the 19th consecutive month of increase, with discounts narrowing on categories like electronics and sporting goods during the full season. The rise in holiday sales was mostly due to the inflation-driven jump in costs and lower discounts, said Rob Garf, vice president and general manager of retail for Salesforce. “Consumers were buying fewer items at higher prices at fewer retailers,” Garf said.

Source: Globe and Mail
Source: Globe and Mail

U.S. Inflation Soared 7% in Past Year, the Most Since 1982

Inflation jumped at its fastest pace in nearly 40 years in December, a 7% spike from a year earlier that is increasing household expenses, eating into wage gains and heaping pressure on President Joe Biden and the Federal Reserve to address what has become the biggest threat to the U.S. economy.

Prices rose sharply in 2021 for cars, gas, food and furniture as part of a rapid recovery from the pandemic recession. Vast infusions of government aid and ultralow interest rates helped spur demand for goods, while vaccinations gave people confidence to dine out and travel. As Americans ramped up spending, supply chains remained squeezed by shortages of workers and raw materials and this magnified price pressures.

The Labor Department reported that a measure of inflation that excludes volatile food and gas prices jumped 5.5% in December, also the highest in decades. Overall inflation rose 0.5% from November, down from 0.8% the previous month.

Price gains could slow further as snags in supply chains ease, but most economists say inflation won’t fall back to pre-pandemic levels any time soon. “U.S. inflation pressures show no sign of easing,” said James Knightley, chief international economist at the financial services company ING. “It hasn’t been this high since the days of Thatcher and Reagan. We could be close to the peak, but the risk is that inflation stays higher for longer.”

High inflation isn’t only a problem for the U.S. In the 19 European countries that use the euro currency, inflation rose 5% in December compared with a year earlier, the biggest increase on record.

Companies large and small are adapting as best they can. Businesses struggling to hire have hiked pay, but rising prices for goods and services have eroded those income gains for many Americans. Lower-income families have felt it the most, and polls show that inflation has started displacing even the coronavirus as a public concern.

The United States hasn’t seen anything like it since the early 1980s. Back then, Fed Chair Paul Volcker responded by pushing interest rates to painful levels – the prime rate for banks’ best customers hit 20% in 1980 – and sent the economy into a deep recession. But Volcker succeeded in taming inflation that had been running at double-digit year-over-year levels for much of 1979-1981.

One trend experts fear is a wage-price spiral. That happens when workers seek more pay to offset higher costs, and then companies raise costs further to cover that higher pay. On January 11, Federal Reserve Chair Jerome Powell told a Senate panel that he has yet to see evidence that wages are broadly driving up prices across the economy.

The biggest driver of inflation, according to economists, are mismatches between supply and demand. Used car prices have soared more than 37% over the past year because a shortage of semiconductors has prevented auto companies from making enough new cars. Supply-chain constraints have driven furniture prices nearly 14% higher over the past year.

Inflation could ease as the omicron wave fades and as Americans shift more of their spending to services such as travel, eating out and movie-going. That would reduce the demand for goods and help clear supply chains.

But some higher prices, such as rents, could prove to be stickier. Rental costs, which have accelerated since summer, rose 0.4% in December, the third consecutive monthly increase. That’s significant because housing costs make up one-third of the government’s consumer price index.

Powell told Congress that if it becomes necessary to fight high inflation more aggressively, the Federal Reserve is prepared to accelerate the interest rate hikes it plans to begin this year. The Fed’s benchmark short-term rate, now pegged near zero, is expected to be bumped up at least three times this year.

Rate increases would make borrowing for a home or car more expensive, and therefore help to cool off the economy. Some economists and members of Congress fear the Fed has acted too slowly to head off inflation and that this could eventually force even sharper rate increases that could damage the economy. 

Source: Globe and Mail