The Grinch Stole Christmas

Retail sales plummeted a jaw-dropping 1.2% in December, the largest one-month decline in nine years. Total retail sales were also revised down slightly for the month of November. Losses in December were broad based, with lower spending on everything from gasoline, which we expected to drop in the wake of falling prices at the pump, to a decline in eating out and online spending. Traditional department stores also experienced a decline. The only bright spots were vehicle purchases, which picked up as consumers continued to buy more expensive SUVs, and spending at Big Box discounters, which benefited from the rise in wages and holiday season employment that was concentrated among low-wage earners.

Core retail sales, which feeds into the calculation of fourth quarter consumer spending, were even worse, falling 1.7% during December. A slight upward revision to the November core reading can’t make up for that. The data is inconsistent with other reports we have received over the holiday season and is subject to revisions. That said, it is ugly. As it stands, consumers pulled back aggressively, in spite of December’s robust job gains and higher wages. The market swoon was likely a factor, with the exception of the lowest income households.

The government shutdown should not have had too much of an impact on December retail sales, except that it delayed the release of the data for more than a month. At the onset of the shutdown, which began at midnight on December 21, hopes were high that it would end quickly, suggesting that the biggest impact on spending will have occurred in January when government workers and contractors felt the pinch from lost paychecks.

Separately, overall and pipeline inflation figures remain muted in December and January, largely in response to low energy prices. This will help to dampen the impact of such a large decline in retail sales. Still, we can’t put lipstick on this pig of a report.

Bottom Line
Consumer spending in the fourth quarter now looks weaker than hoped, setting the stage for a more dramatic slowdown at the start of the year. The losses experienced left many retailers in the hole in early 2019, and will likely be compounded by the effects of the government shutdown. A shortfall in tax refunds for low and middle wage households are another hurdle. Changes in withholdings has meant that tax cuts were spent in 2018 rather than to be enjoyed as 2019 tax refunds. Fourth quarter real GDP growth now looks like it has slipped into the mid 2% range (if not lower); previous estimates had it close to 3%.

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