HIGHLIGHTS OF THE WEEK
- December retail sales came in significantly weaker than expected, falling 1.2% m/m, with the decline being broad-based. Consumption in Q4 is now tracking around 2.6% annualized – softer than expected, but still a pretty good showing.
- The retail sales report provides a weak handoff to 2019. The fact that the government shutdown extended into January and consumer confidence retreated on the month, further reinforces the notion for a soft print in first-quarter spending and GDP.
- Core inflation remained at 2.2% (y/y) in January, where it has sat for five of the past six months. And there is little indication that it will move in either direction soon. This should provide comfort for the Fed to remain patient.
Wall of Uncertainty
They say good things come to those who wait. But judging from developments this week, we’ll have to wait a bit longer. The delayed December retail sales report finally came out this week, but the results were deeply disappointing. While consensus had set a low bar for a nearly-flat print, sales fell a whopping 1.2% m/m – the worst decline since September 2009 (Chart 1). Moreover, the pullback was broad-based. Apart from gains at autos and building materials stores, everything else was in the red. Sales in the ‘control group’, which strips out volatile categories and is then used in the calculation of GDP, fared even worse (-1.7%).
The weak report raised a few eyebrows, with its reliability in question among economics circles. December’s result is hard to square with other industry reports, such the Redbook index, which shows same-store sales accelerating in year-over-year terms in December. The fact that non-store sales (-3.9%) weren’t spared from the pullback also raises some suspicion. This category is largely made up of online sales, where there were no other major signs of stress during holiday season. Still, giving the Commerce Department the benefit of the doubt here, it would appear that the threat and subsequent materialization of the late-year government shutdown, together with a sharp selloff in equity markets amidst elevated trade tensions with China, prompted Americans to keep a tight grip on their wallets.
Consumer spending in the fourth quarter is now tracking around 2.6% ann. – softer than we previously expected, but still a pretty good showing. The December weakness also provides a weak handoff to the start of 2019. The fact that the government shutdown dragged on until late-January and consumer confidence deteriorated on the month (Chart 2), further reinforces the notion of softer spending, with consumption expected to advance at just below 1.5% (ann.). A pullback in small business confidence and industrial production in January provide further credence to the view for a soft quarter overall.
Similar to last year, however, we don’t expect the first-quarter performance to set the pace for the rest of the year, so long as a resilient labor market shores up spending. Consumption is expected to rebound in the second quarter, provided that there is no major disruption on the trade front or another government shutdown. Progress appeared to have been made on both of these areas this week. Reports indicate that Chinese and U.S. negotiators made headway in agreeing on broad principles, with negotiations to continue next week in Washington. It appears that President Trump will get his border wall funding by declaring a national emergency, and is also expected to sign a bipartisan spending bill that will avoid a second shutdown.
This week’s developments reinforce the notion that the Fed will stay put until muddy waters begin to clear. The other part of the Fed’s calculus, inflation trends, provide added comfort for patience. Core CPI has been holding at just above the Fed’s target recently (2.2% y/y), with little indication that it will shift in either direction. For now, it’s all about keeping the faith and playing the waiting game.
Admir Kolaj, Economist | 416-944-6318
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