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U.S. Retail Sales Put Economic Recovery In Doubt – Now What?

Mixed messages on the current condition of the U.S. consumer continue, with retail sales in U.S. recording their worst fall in 11 months in December as demand declined in almost all categories. The government data shook investor confidence who are looking for a sharp acceleration in consumer spending in the fourth quarter as a result of a steep drop in gasoline prices across America. The report also cast doubt on the pace of economic growth.

Economists, however, warned that it is not a good to read too much into the surprise weakness, noting that holiday spending created problem to smooth December data for seasonal fluctuations.

“Faulty seasonal adjustments from shifts in holiday spending patterns are probably more to blame for the December decline,” said Steve Blitz, chief economist at ITG in New York. “Looking at the last three months, spending is not collapsing.”

The Commerce Department said on Wednesday sales at retailers dropped 0.9 percent, the largest fall since last January. The gauge of U.S. consumer spending rose 0.4 percent in November that was smaller than previously estimated.

“Maybe the optimism a month ago got a little too heated,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut, who is among the best forecasters of retail sales over the past two years, according to data compiled by Bloomberg. “It’s a weak number but it follows some really strong ones and I don’t think it changes my general feeling on how the economy and consumers are doing.”

Economists were predicting only a 0.1 percent drop. They expect sales to rebound in January, coming against the backdrop of lower gasoline prices and a firming labor market. Some were saying that December’s decline could be revised away.

Bricklin Dwyer, a senior economist at BNP Paribas in New York, said the reason for lower December sales number was that there were fewer-than normal shopping days after Black Friday in November, throwing off the so-called seasonal factor used to adjust the data.

“For January 2015, this seasonal factor will boost sales by the largest factor since 2006,” said Dwyer.

“This combined with the fact that we have seen a massive boost to consumers’ wallets as a result of the rapid decline in gasoline prices, suggests that January could be a big month that reverses much of the December drop,” he said.

Declining gasoline prices also affected the figures. But even taking out the 6.5 percent fall in receipts at gasoline stations, which came out to be the biggest since December 2008, retail sales suffered decline.

Weak Report Leads To Lower Forecasts

Wednesday’s report disclosed that electronics merchants, clothing outlets, department stores and auto dealers all posted sales declines in December.

Several firms including Morgan Stanley and JPMorgan Chase & Co. lowered tracking estimates for fourth-quarter consumer spending after the retail data. Economists at Morgan Stanley reduced their estimates for purchases to 4.1 percent versus prior forecast of 4.4 percent, while JPMorgan trimmed its forecast to 4.3 percent from 4.7 percent.

The December sales drop “came after two pretty strong numbers,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, whose projection for a 0.5 percent sales decline was among the lowest in a Bloomberg survey. “When you lump them all together, it looks like the fourth quarter as a whole was still pretty strong.”

Beige Book

A Federal Reserve poll results announced yesterday showed most regions registered “modest” of “moderate” economic growth thanks to surge in household purchases.

“This certainly doesn’t support the unexpected drop in retail sales,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The Federal Reserve’s 12 regional branches have released the latest Beige Book, sayinf “Consumer spending increased in most districts, with generally modest year-over-year gains in retail sales.” Several districts “expect somewhat faster growth over the coming months.”

U.S. GDP

The Commerce Department’s retail sales figures used to calculate gross domestic product, which exclude categories such as food services, auto dealers, home-improvement stores, and service stations, fell 0.4 percent. That was the worst performance since a pair of significant snow storms hit much of the country in January 2014, after rising 0.6 percent in November.

Sales of electronics showed a 1.6 percent fall in December, while apparel stores reported 0.3 percent drop in sales, according to the report. Receipts were down 0.9 percent at general merchandise stores and 1.9 percent drop was recorded in sales of building materials.

Purchases at service stations marked seventh monthly fall in a row, plunging 6.5 percent last month. Gas station receipts represented nearly 10 percent of overall retail sales last year. The average price of regular gasoline at U.S. pumps fell to $2.10 this week, the cheapest since May 2009, according to U.S. motoring group AAA. It dropped 19 percent in December.

As a result of lower fuel costs, prices of imported goods down 2.5 percent in December, a report from the Labor Department showed. The cost of non-fuel goods bought in a foreign country fell 0.1 percent last month.

Auto Sales

Lower fuel prices have encouraged consumers to increase spendings on new vehicles, increasing demand for automakers such as Ford Motor Co. and General Motors Co. Cars and light trucks sold at a 16.7 million annualized rate a month on average last quarter, marking the strongest year since 2006, according to Ward’s Automotive Group. But, accrording to yesterday’s report, cars fore sale at dealers dropped 0.7 percent last month after recording a 1.6 percent increase in November.

Stronger Jobs And Wage Growth Is Needed

Strengthening labor market and higher wages are required for households to put more money in a way that would sustain recent economic momentum.

Labor Department data last week showed 252,000 nonfarm jobs were created in December, well above expectations but lower from a 353,000 gain the prior month. The unemployment rate decreased 0.2 percentage point to 5.6 percent, reaching the lowest level since June 2008.

Wages failed to provide enough support, with average hourly earnings falling 0.2 percent in December to suffer the biggest percentage drop since at least 2006. That encourages consumers toward savings or racking up debt instead of increasing the amount of spending.

“Macro challenges including lack of wage growth, persistent low labor force participation and rising housing and health insurance costs may continue to adversely impact low- and middle-income customers,” Family Dollar Stores Chief Executive Officer Howard Levine said on a Jan. 8 earnings call. “When we look at the Family Dollar shopper, it is clear that she has continued to face economic headwinds even as the broader market has experienced a recovery.”

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