Price pressures and continued labor shortages magnified by the rapid spread of the omicron variant drove retail sales down by a disappointing 1.9% in December.
The decline on the month came despite a strong holiday shopping season, when many consumers heeded warnings about depleted inventories and made their purchases earlier.
Many consumers heeded warnings about depleted inventories and made their purchases earlier.
Beyond the decline in the headline advance retail sales number, the control group—which feeds into overall consumer spending data—had an even steeper drop of 3.1% on the month, according to data released by the Commerce Department on Friday.
November’s readings for both series were also revised down in Friday’s report, to a gain of 0.2% from a 0.3% increase in the top-line number, and a decline of 0.5% from a 0.1% drop in the control group.
The sharp downturn in December reaffirmed the significant shift in consumers’ shopping behavior in the last quarter of the year from spending during holiday time to shopping early in October. With supply chain disruptions prompting concern of empty store shelves, sales in the last half of the year peaked in October.
Categories that traditionally drive growth during the holiday season—including clothing, department stores, furniture and electronics—saw the sharpest drops in December, led by online sales, which were down by 8.7%, and department stores, down by 7%.
Auto sales also contributed to the drop in overall sales, down by 0.4% from a 0.2% increase in November as depleted inventories failed to catch up with demand.
Accounting for roughly 25% of total U.S. household spending last year, retail sales are an important component in the government’s calculation for private consumption and ultimately gross domestic product growth. But only sales volume will matter as both consumption and growth are adjusted for inflation.
Inflation’s impact
Consumers certainly felt the pressure from elevated prices in December. For the second month in a row, inflation continued to outpace retail sales as real retail sales—which reflect changes in sales volume—fell by 2.4% in December, according to our estimates.
On a quarterly basis, early spending in October helped pull the overall nominal sales number in the last quarter up by 2.11%, while real sales were down by 0.42%. This will pose downside risks to economic growth in the fourth quarter, which was expected to expand at a similar rate to the first two quarters of the year.
Since the estimate for retail sales is based on advance data, it is often subject to revision. For retail sales in December, the margin of error for the top-line number was 0.5 percentage point, according to the report.
But it is hard to predict the direction of revision, which will not be available until next month’s report, because of the mixed evidence on spending for the holidays.
Across the country, consumer spending continued to grow at a steady pace, according to the Federal Reserve’s beige book—a collection of anecdotal evidence from the 12 Federal Reserve districts—that was released on Wednesday.
But the book also noted that most regions had a sudden pullback in leisure travel, accommodations and restaurant traffic as the omicron variant surged in the last couple of weeks of December.
Data for sales from restaurants in December was quite consistent with such a pullback. The series made a sharp drop from an increase of 0.6% in November to a decline of 0.8% in December.
Earlier data from Mastercard SpendingPulse—which measures national in-store and online retail sales across all payment types—showed that holiday sales excluding autos from Nov. 1 through Dec. 24 jumped by 8.5% on a year-over-year basis.
While such an increase might be impressive in normal times, it was less than half of what November and December retail sales data from the Census Bureau indicated, which were up by 19.3% and 18.8% respectively from a year ago, foreshadowing some of the pullback in retail spending.
The takeaway
As the omicron variant continues to spread, we expect retail sales to trend downward in the coming months. But the pullback will be swifter than what happened with the delta variant. As a result, growth will be pushed forward into the next couple of months as the number of cases have been retreating from an all-time high.
