Seasonal Adjustment Skews Retail Sales Sharply Higher

Retail sales surged a stronger-than-expected 5.3% in January, reversing three months of declines. Data for November and December were revised even lower. Three factors account for the sharp rebound in sales last month: Stimulus checks, which reached consumers’ wallets even faster than they did last spring; the fact that January tends to be an extremely weak month for consumers; and, a receding pace of infections which brought people back to the stores and online. We tend to see a drop when consumers pull back in the wake of the holiday season. That drop is factored into the seasonal adjustment of the data to smooth out the moves we see month to month.

Gains were broad-based with solid single- and double-digit increases in every category. (Gains are typically in the tenths of a percent, not full percentage points.) Vehicles sales rose 3.1%, one of the smaller gains of the month but still robust. The only factor holding them back is inventories, which are nearly nonexistent for both new and used vehicles. High-wage households have snapped up larger SUVs to upgrade their rides in a world where they are avoiding mass transit and are now towing boats and RVs.

We saw double-digit gains on everything from furniture and appliances to spending online. Combined with a solid 8% gain in spending at sporting goods stores and 4.6% rise in building materials and garden stores, that reflects strength in the housing and remodeling markets, which have taken off during the pandemic along with the desires to enhance our ability to work and work out from home.

The largest monthly gains showed up in traditional department stores, where sales jumped 23.5% after seasonal adjustment. Before seasonal adjustment, sales were actually down 41.6% at department stores. That underscores the distortions created by traditional seasonal adjustments in what is a completely nontraditional year. Some of those gains will be reversed as we move into February and see the effects from widespread power outages and a deep freeze that have pushed consumers back into their homes.

Spending on food also popped, with sales at both restaurants and grocery stores rising after weakness late last year. Gains for the month, however, were concentrated in areas that we saw earlier in the pandemic: goods as opposed to services. Some mitigation measures were lifted on indoor dining during the month but the focus remains on takeout.

The total for core retail sales, which feeds into the consumption figure for GDP for the quarter, rose 6% in January and reinforces our view that stimulus will help to buoy overall GDP gains in the first quarter. The sticking point remains services, which weakened after the increase in holiday spending during November and December. Air travel and hotel occupancies slipped again at the start of the year.

A deep freeze and widespread power outages are likely to put a damper on retail sales for February. The losses could be more than we would typically expect, given where the temperatures plunged - in parts of the South and West - and the inability to shift online spending as millions were left without power.

Separately, the Producer Price Index (PPI) jumped 1.3% in January, another upside surprise for financial markets. This is a record monthly increase for the data series, which began in 2009. Gains were strong in both services and goods. A large portion of the jump in price for services was a 9.4% jump in the prices for portfolio management in the financial sector. The costs of outpatient care, guest room rentals and freight carried by trucks also jumped substantially. Bottlenecks have formed, which have pushed up transportation costs.

The jump in prices for goods, which rose 1.4% during the month, was driven by a double-digit increase in gasoline prices. The rise in gas is expected to continue in the months to come as power outages in the oil patch reduce the supply of gas for consumption.

Year-over-year, the PPI was up 1.3%. That marks a significant acceleration from the pace we have seen in recent months. Core PPI (excluding food and energy) was up 1.3% after seasonal adjustment from a year ago. The Federal Reserve has made clear that it would look past any near-term jump in prices as transitory and hold down short-term interest rates until we attain a sustained increase in employment and resumption of wage gains.

Bottom Line
Stimulus matters. Checks sent out last month stemmed the usual slowdown that we see in spending in January. The results overstated the impact on consumer spending and will dissipate somewhat as we deal with the deep freeze and power outages of February. The gains could undermine current negotiations for stimulus being pushed by the new administration. Look for debate to intensify on better targeting aid to those who need it most.

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