January retail sales data indicated a modest rebound in spending after a weaker-than-expected close to 2018. The 0.2 percent month-over-month increase in retail sales and the 0.9 percent increase in the retail sales control group figure that feeds into estimates of gross domestic product both affirm that the United States did not fall into recession to kick off the year. Just below the surface, however, weak consumer spending on motor vehicles and parts, and the large downward revision on December’s already bleak sales figures point toward a slowdown in overall economic activity in the current quarter. The first three months of this year are currently on track to grow at less than a one-percent pace.
The downward revisions to the December data will shave 0.2 percent off of the fourth quarter 2018 GDP estimate, which is now tracking at about 2.4 percent. The economy will need a healthier increase in consumer spending to post a 2 percent increase in the current quarter, which is tracking at well below the 2.9 percent year-over-year trend posted in 2018.
It is likely that the financial volatility that characterized the final three months of 2018 caused a significant pullback on the part of households who likely experienced large losses in paper wealth to close out the year. Remember that about 40 percent of households are responsible for 60 percent of overall spending, which is a function of the economic inequality in the economy, and there is no clear sign that the rebound in January retail sales was anything more than a simple rebound in basic spending. Improved outlays do not denote a return to the strong trend in spending that characterized 2017 and most of 2018. Weakness in outlays on motor vehicles and parts is somewhat analogous to the softness being seen in the housing sector.
Consumer headwinds
Because advance retail sales are typically characterized by month-to-month noise and large revisions, we prefer to look at the three-month average annualized pace of sales to help identify the larger trend. Inside this metric one can see the general slowing of overall spending late last year, which will likely spill into 2019. The top line using this metric reflects the large decline in December outlays, which fell by 1.8 percent, while spending excluding autos, declined by 2.9 percent. Excluding gasoline sales, the pace of retail spending increased 0.5 percent; excluding autos and building materials, it is down 3.7 percent. The control group, which is used to calculate spending inside the GDP accounts, fell by 0.5 percent.
The top line increase of 0.2 percent was damped down by the gasoline sales due to falling prices (minus 2 percent) and weak sales of motor vehicles and parts (minus 2.4 percent), whereas outlays on building materials jumped 3.3 percent, sporting goods 4.8 percent and e-commerce increased by 2.6 percent. Outlays on health and personal items jumped by 1.6 percent, while food and beverages increased by 1.1 percent. Spending on electronics declined 0.3 percent and fell 1.3 percent on clothing. Outlays on general merchandise increased by 0.8 percent, eating and drinking establishments advanced 0.7 percent and at department stores by 0.1 percent.
