On Jan 14, the US Census Bureau reported weaker-than-expected month-over-month results in US consumer spending in December. While the magnitude was small, the number was preceded by a minus sign, which was a surprise to many. Most widely quoted was the .9% drop from November to December in retail sales and food services. This was the largest month-to-month decline in nearly a year and caused a broad stock market drop.
The results were naturally tweeted, posted, headlined, shared, and retweeted. In a world where data gets slammed into sound bites and 140-character text strings, a great deal of pessimism circulated around digital media. Even professional analysts and economists sang the blues.
From Dan Greenhaus, chief strategist at BTIG: “Importantly, core retail sales – which matter for GDP estimates, declined by 0.4% whereas expectations were looking for an increase of 0.4%. Needless to say, that is a terrible miss.”
From Andrew Wilkinson, market analyst at Interactive Brokers: “Weaker gas prices did not seem to inspire consumers to go out and splurge on alternative items. The fact that the report fails to show redistribution of the gas bonanza is somewhat perturbing.”
Ironically, the decrease in gasoline costs that were expected to lift consumer spending actually dragged it down. Service station sales fell 6.5%, the largest drop since 2008. The big ticket part of the auto sector suffered as well, with a .7% drop at car dealers.
There are short-term and long-term reasons for despair. In the short term, December month-to-month numbers were concerning because they confounded common arguments. As illustrated, lower gasoline spending did not get re-channeled to other retail segments. Last minute shoppers did not materialize as foot traffic fell 8%. Lower in-store sales caused by weather were not offset by higher online sales (they dropped too). Increases in the employment rate were not a lift, partially offset by a December drop in average hourly earnings).
In the long term, we are witnessing a change in US consumer optimism. Savings at the pump channeled into savings at the bank is good for consumer net debt but not good for retail sales. The Great Recession did lasting damage to household net worth. Older Americans are spending more prudently into retirement. Rising healthcare costs absorbed by businesses put a damper on salary increases.
But the concerns are overblown. Month-to-month shifts say less about momentum than year-over-year numbers. By all measures, December 2014 shined brighter than December 2013. December-to-December numbers were up 3.2%, according to the Commerce Department. The National Retail Federation (NRF), was even more bullish, reporting a gain of 4.6% in December.
While December numbers carry the weight of recency, the full quarter’s results are more important. Total holiday sales from the National Retail Federation (NRF) were up 4%. The strongest sectors were home furnishings, health and personal care, which grew at twice the overall rate.
Other key drivers are breaking in the right direction. The percent of people calling the economy “fair or poor” dropped from 73.2 percent in November to 68.7 percent in December, so says Chain Store Guide. The Fed may now be less likely to raise interest rates in June, which would have been a drag on economic growth.
And for the glass-half-full and cloud-has-a-silver-lining believers, the concerning thing has become the reassuring thing. That drop in gasoline prices that was supposed to get respent? That was bad news on Wednesday and good news on Thursday. Since gas prices actually drove the decline in retail sales, simply remove them from the equation. Here’s what you get: core retail sales stripping out gasoline and auto were up 0.4%. And the gift will keep on giving as successive months of low pump prices rouse consumers to spend again.
Allow more analysts and economists to question the assumptions behind the numbers. Says Steven Blitz, chief economist at ITG: “Faulty seasonal adjustments from shifts in holiday spending patterns are probably more to blame for the December decline. Looking at the last three months, spending is not collapsing.”
And let the tweeters have the last words: