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COVID & Inflation Prompt Pullback

RFP
Retail sales plummeted 1.9% in December after being revised down for the month of November. The drop was even larger after adjusting for the 0.5% advance in inflation during the month. Losses were broad-based and occurred in every category with the exception of spending at building materials & garden centers and miscellaneous store retailers. The latter is an extremely small category which includes spending at florists, office supplies and used merchandise. Many companies delayed a return to offices in January in response to Omicron, which prompted people to stock up on office supplies.

The drop in spending overall was the largest monthly pullback since February 2021, which occurred as hospitalizations surged last winter. That bodes poorly for January and underscores the risk of a hard stop or contraction in growth during the first quarter. The drop comes as emergency aid and stimulus linked to the pandemic have lapsed. The last of the expanded child tax credit checks were sent out in mid-December.

Retail sales were still up 16.9% from a year ago, well above the 7% surge in overall inflation from a year ago. The recovery in goods has been robust. Services are still catching up with the exception of spending at restaurants and bars. Spending at restaurants and bars fell in December but are still up at a double-digit pace from 2019 levels.

Spending online posted the largest declines as consumers focused on travel and tourism instead of goods. Throughput at TSA checkpoints exceeded 2019 levels during some days over the holidays. The problem was flight cancellations, which surged as flight crews called in sick due to a surge in infections.

Core retail sales, which feed directly into GDP figures, plunged 3.1% in December. Real GDP is now expected to grow at a 6.2% pace in the fourth quarter, 0.8% below what we expected just a week ago. Some of the slowdown in consumer spending will show up as more inventory rebuilding, which with any pullback in spending we see in January, should at least temporarily alleviate the upward pressure on inflation.

Bottom Line
The health of the economy is ultimately dependent upon the health of the population. The Federal Reserve has concluded that variants are more inflationary than disinflationary. The only silver lining is that Omicron tends to descend as rapidly as it ascends.

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