A Silver Lining in a Soot-Soaked Retail Sales Report
Analysts had visions of sugar plums dancing in their heads for December retail sales. Instead, they got a lump of coal.
The Census Bureau said Tuesday that retail sales were flat in December, well short of the consensus forecast for a 0.4 percent gain. That was a pretty serious retreat after the solid 0.6 percent increase in November.
There are two competing narratives explaining this. Optimists say that holiday demand just showed up earlier than expected, and so consumers did not have as much leftover on their shopping lists in December. The pessimists say it looks like consumers just ran out of steam, an impression bolstered by the very poor reading for consumer sentiment from the University of Michigan in December.
But were the numbers really so bad? The headline figures for month-to-month changes in retail sales are seasonally adjusted. In December, the seasonal adjustments are always enormous, and this year’s were truly huge.
On an unadjusted basis, total retail and food service sales jumped 10.9 percent from November to December, stronger than the 8.8 percent gain in the same period a year earlier. December was up 3.8 percent year over year on an unadjusted basis, with October up 3.5 percent and November up 1.9 percent.
Of course, the figures get seasonally adjusted for a reason. Shopping always explodes in December. This year it just didn’t boom as much as the number crunchers at the Census Bureau thought it should.
Another way to look at it is through the lens of year-over-year unadjusted numbers. That shows that retail sales rose 3.7 percent from a year earlier. Excluding gas stations, sales were up 4.2 percent.
So, headlines blaring that the holiday season was a disappointment are a bit much. For the full fourth quarter, unadjusted sales rose about 3.1 percent from a year earlier. That’s decent if not impressive growth over the full holiday shopping season.
Bank of America’s card data estimates total retail spending rose just 0.7 percent from a year earlier in December and was up 1.8 percent on a per-household basis. Their channel split also matches what legacy retailers have been living with for years: online spending up 6.7 percent year over year in December, brick-and-mortar down 1.9 percent.
Real Retail Sales Rose
The figures are also not adjusted for inflation. But this is harder than it looks. A lot of “real retail sales” commentary starts with the wrong deflator. Retail sales are overwhelmingly a goods story—clothing, electronics, general merchandise, groceries—while the consumer price index (CPI) for “all items” is dominated by services inflation, led by shelter and other sticky categories that never pass through the retail register. That might not matter much when both sides of CPI are moving in tandem; but in a period of high services inflation and low goods inflation, it can be misleading.
In December, all items CPI was up 2.7 percent year over year, while CPI for commodities was up 1.7 percent, and goods less food and energy was up just 1.4 percent. Use the services-heavy headline CPI to deflate goods spending, and retail volumes look weaker than they are. Use a core goods price measure, and the same nominal gains translate into modest real growth instead of a contraction. If we go with the 1.7 deflator, real December sales increased two percent from a year ago. That’s not a blowout month, but it is healthy growth.
The inflation angle is where the December retail story gets interesting. A flat December month-to-month print has tended to line up with cooling inflation more often than reheating. Looking back at every year since 2000, and focusing on years when December retail sales were flat, nearly flat, or down on a seasonally adjusted basis (excluding 2008 and 2020 for obvious reasons), headline CPI inflation in the following calendar year ran hotter than the prior year only twice. In years when December retail sales posted more than a rounding-error gain, inflation accelerated nine times. The signal is stronger in goods: goods inflation accelerated only twice after a flat or down December, versus ten times when December retail sales were firmer.
The mechanism is plain. Weak year-end demand usually means limited pricing power as the new year begins. January markdowns deepen, inventory plans get trimmed, and retailers compete harder to move goods. That pressure shows up in goods prices first, and it often bleeds into the broader inflation picture as the year unfolds.
One additional wrinkle is demographic arithmetic. The Dallas Fed and other researchers have argued that the economy’s break-even job growth has fallen as population growth slowed—a shift that accelerated over the past year amid tighter immigration enforcement. The same logic applies to retail sales. With fewer new households being added to the consumer base, aggregate spending can look softer even when spending per household is holding up. That’s worth keeping in mind when analysts treat any single monthly retail print as a referendum on the consumer.
Note, however, that is not much comfort for investors. They will not care why sales aren’t growing as much as expected. Lower sales are lower sales. But it does matter if we are trying to assess the health of the U.S. consumer rather than raw aggregate demand.
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