December retail sales fall sharply, industrial production eases modestly

December retail sales fall sharply, industrial production eases modestly

*U.S. retail sales fell 1.9% m/m in December (consensus -0.1%) following November’s downwardly revised 0.2% m/m increase, reflecting higher prices that are beginning to dampen demand, the impact of the highly transmissible omicron variant, ongoing supply constraints, and a ‘pulling’ forward of holiday spending. Real retail sales which take rising prices into account fell 2.4% m/m and have declined 6% on a six-month annualized basis (Chart 1). Despite December’s decline, retail sales have increased 20% since February 2020 and remain well above their pre-pandemic trend, with rising nominal wages, employment, and healthy household balance sheets likely to be supportive of consumption growth once the impact of the Omicron variant dissipates.

*Consumer prices have risen sharply through 2021, with the headline Consumer Price Index (CPI) rising 7% yr/yr, while inflation of goods less food and energy rose 10.7% yr/yr. Elevated prices are weighing on consumer demand, evidenced by the broad based December slump in retail sales, in which ten of thirteen major categories experienced a decline in sales over the month. Notably, sales at non-store retailers, which includes electronic shopping and mail-order houses fell 8.7% m/m in December (Chart 2).

*Sales at gasoline stations fell 0.7% m/m, largely reflecting decreasing gasoline prices. Supply constraints and distribution bottlenecks likely contributed to a 4.5% m/m decline in sales at furniture, home furnishing, and electronics/appliance stores, which were also likely weighed down by delays to home construction and completions. Sales at motor vehicle and parts dealers also declined by 0.4% m/m.

*Consumers, wary of supply chain disruptions and delays that have depleted inventories and lengthened delivery times, likely pulled holiday retail purchases forward into October and November, which together with unfavorable seasonal adjustments contributed to declining sales at electronics and appliance stores (-2.9% m/m), clothing and accessory stores (-3.1% m/m), and department stores (-7% m/m).

*Omicron’s fingerprints on the December retail sales print are evident. Discovery of the variant was announced over the Thanksgiving holiday, and by mid-December daily new cases reported by the CDC were comparable to those during the earlier delta variant driven surge in cases. Similar to prior waves of the pandemic, when cases rise rapidly consumers generally pull back from shopping and dining in person. High frequency data suggest patronage and visits to retail and recreation destinations have declined, particularly in late December, while in-person dining has also taken a hit. Anxious over the future course of public health conditions, some consumers likely took the precautionary step of closing their pocketbooks.

*Control group retail sales (ex. gasoline stations, food services and drinking places, building materials, and auto sales) which are factored directly in GDP tumbled 3.1% m/m, and the decline is even more pronounced in real terms (Chart 3). This lowers the starting point for consumption in Q1 2022. Real consumption in Q1 is likely to be softer than currently forecast reflecting the lingering negative impact of the omicron variant.

* Industrial production fell a modest 0.1% m/m in the wake of an upwardly revised 0.7% m/m increase in November, with notable declines in manufacturing (-0.3% m/m) and unseasonably warm weather contributing to a decline in utilities production (-1.5% m/m) (Chart 4). Motor vehicle and parts production declined 1.4% m/m but increased 5.8% q/q in Q4, and is poised to continue to increase through 2022 to meet strong demand and replenish inventories as the semiconductor shortage eases. The decline in utilities production will translate into a decline in utilities consumption in December and will weigh on December’s Personal Consumption print.

Chart 1.

Chart 2.

Chart 3.

Chart 4.

Mickey Levy, [email protected]

Mahmoud Abu Ghzalah, [email protected]

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