US Retail Sales and Labor Market Strength as 2024 Concludes

By a recent report, U.S. retail sales saw an uptick in December as households made substantial purchases on motor vehicles and various other goods. This trend signals robust demand within the economy, further solidifying the U.S. Federal Reserve's cautious stance regarding interest rate cuts this year.

The latest report from the Commerce Department encouraged economists to revise their growth projections for the economy’s final quarter of the year, indicating potential growth nearing the vigorous pace observed in the preceding quarter. This follows encouraging news about a surge in nonfarm payrolls in December, coupled with a decrease in the unemployment rate from 4.2% in November to 4.1%.

Even as the underlying inflation rate slowed last month, consumer prices experienced the largest monthly increase in nine months. The strength of the labor market, supported by higher wage growth, is driving consumer spending.

"With the current retail sales data, there’s no pressing argument for the Fed to lower interest rates," stated Carl Weinberg, chief economist at High Frequency Economics. "The economy is effectively at full employment, and therefore, no additional monetary stimulus is required."

Retail Sales Performance

According to the Census Bureau, retail sales rose by 0.4% in December, after an upwardly revised 0.8% rise in November. This performance surpassed the forecast of 0.6% growth, which economists were expecting based on previous reports indicating a 0.7% increase in November. Year-on-year, retail sales increased by 3.9% in December.

Sales at auto dealerships recorded a 0.7% increase following a 3.1% rise in November. Notably, furniture store sales elevated by 2.3%, while clothing retailers experienced a 1.5% rebound.

Sales in sporting goods, hobbies, musical instruments, and bookstores jumped by 2.6%, and miscellaneous store receipts, including gift shops and florists, soared by 4.3%. However, online store sales saw only a modest rise of 0.2%. Meanwhile, the food services and drinking place category, which is a key indicator of household financial health, reported a decline of 0.3% after a small increase in November. Economists suggest that extreme cold weather may have kept consumers at home.

Sales at building material stores dropped by 2.0%, whereas increased gasoline prices led to a 1.5% rise in receipts at service stations.

Consumer Sentiment and Economic Forecasts

Consumer sentiment surveys indicate that households might be rushing to make purchases in anticipation of tariffs under the incoming presidential administration. President-elect Donald Trump has announced wide-ranging tariffs on imported goods, which could lead to higher prices for consumers. However, data from the Bank of America Institute suggests limited evidence that consumer purchasing behavior accelerated due to these tariff concerns.

Excluding automobiles, gasoline, building materials, and food services, core retail sales surged by 0.7% last month, following an unrevised 0.4% gain in November. Core retail sales are crucial as they closely reflect the consumer spending component of the gross domestic product (GDP).

Economists anticipate consumer spending grew at an annualized rate of 3.3% in the fourth quarter, following a 3.7% increase in the July to September quarter. As a result, Capital Economics revised its GDP growth estimate for the last quarter to an expected 2.9%, increasing from an earlier estimate of 2.7%.

The economy had grown at a 3.1% rate in the third quarter, significantly higher than the 1.8% growth rate that the Federal Reserve views as sustainable without causing inflationary pressures.

The Federal Reserve is not projected to lower interest rates this month, with indications that only two reductions might occur throughout the year, down from the four initially outlined in September.

Labor Market Analysis

Fed Governor Christopher Waller expressed optimism that inflation may continue to abate, potentially allowing the Fed to enact rate cuts more rapidly than previously anticipated. Following his remarks, U.S. Treasury yields fell, the dollar weakened, and stock prices on Wall Street dipped.

The Fed's overnight interest rate has been lowered by 100 basis points to a range of 4.25% to 4.50%, following a steep 5.25 percentage point increase over 2022 and 2023.

"Tariffs are a significant downside risk for this year, as rising inflation on consumer goods will disproportionately affect lower-income households, risking further divides among consumers," noted Michael Pearce, the deputy chief U.S. economist at Oxford Economics.

Low-income families are facing challenges, many with little to no savings. A separate report from the Labor Department revealed that initial claims for state unemployment benefits rose by 14,000, totaling 217,000 for the week ending January 11, contrary to economists' expectations of 210,000 claims.

Despite this uptick, claims data tend to be erratic at the start of the year, yet they continue to show low layoffs overall. The rise in claims last week may have been affected by unusually cold weather, resulting in significant increases in applications from Michigan, Illinois, Ohio, and Missouri. California also saw significant increases, although economists debated whether wildfires played a role in this.

The recent Beige Book report from the Fed described employment levels as having "ticked up on balance" during early January, with many sectors citing difficulties in finding skilled workers and reports of layoffs being uncommon. However, some districts indicated increased uncertainty regarding future staffing needs.

Furthermore, the number of people receiving unemployment benefits declined by 18,000 to 1.859 million for the week ending January 4, suggesting ongoing hiring.

Experts predict that the job market will remain stable into 2025, although Stuart Hoffman, chief economic advisor at PNC Financial, identified immigration restrictions from the incoming administration as a risk that could limit the availability of workers.

retail, sales, economy