Americans increased their spending at retail shops and dining establishments last month, signaling that consumers still possess the ability and willingness to shop.
According to the Commerce Department, retail sales grew by 0.4% in December compared to the previous month. This figure is a decrease from November’s revised gain of 0.8%.
The data indicates that despite many Americans facing challenges due to rising prices and high-interest rates, a low unemployment rate and increasing wages are motivating millions to continue spending, which in turn supports economic growth. A recent government report revealed that hiring activities surged in December, pushing the unemployment rate down to a low 4.1%.
Although last month’s sales increase fell short of economists’ expectations, Paul Ashworth, chief North American economist at Capital Economics, labeled it a strong report. He noted that the sales figure was dampened by a noticeable decline in building materials sales and a slight drop in restaurant spending, while most other retail sectors reported positive growth.
Ashworth has since revised his economic growth estimate for the last quarter of the previous year upward, now anticipating a robust annual growth rate of 2.9%, an increase from the earlier estimate of 2.7%.
Retailers experienced solid sales throughout the holiday shopping season, with December’s uptick mainly driven by a 0.7% increase in vehicle sales and a 2.3% rise in furniture purchases. Additionally, sales in sporting goods stores surged by 2.6%, while clothing retailers saw a 1.5% gain.
It’s important to note that this report does not account for inflation, which ticked up during the month. The data reflects primarily sales of goods, where price increases have been relatively subdued. Compared to last year, sales rose.
Total retail sales increased by 3.9% in December when compared to the same month a year earlier, even as overall goods prices experienced only a marginal rise of 0.3%.
After a significant decline in 2023, inflation appears to have stabilized at around 2.7% in recent months, although prices remain considerably higher than they were four years ago. In a related report, the Labor Department indicated that core prices—excluding the often volatile food and energy segments—rose more slowly last month, with negligible increases in clothing prices and a deceleration in rental costs.
These cooler core inflation numbers have fueled optimism among economists and investors on Wall Street that the Federal Reserve may consider further cuts to its benchmark interest rate this year, following three reductions last year that brought the rate down to approximately 4.3%.
This retail sales report comes as numerous retail executives gathered for the National Retail Federation’s annual conference in New York, where discussions covered a variety of issues, including cautious consumer behavior, advancements in artificial intelligence, and concerns over tariffs.
While the conference followed a positive holiday shopping period, consumer behavior showed signs of a divide. High-income shoppers, aided by increasing home values and stock market gains, continue to spend more, while those with lower incomes are feeling the pressure of ongoing inflation and have reduced their expenditures. Many consumers are also becoming more price-sensitive, a trend analysts project will persist into 2025.
Greg Daco, chief economist at EY-Parthenon, noted the imbalance, stating, “Families at the higher end of the income spectrum are doing more than their fair share of consumer spending and remodeling.” In contrast, those at the lower end are grappling with difficulties due to the current pricing landscape.
Amidst these challenges, the retail environment has produced both thriving and struggling sectors. According to Coresight Research, store closures reached 7,327 last year, marking a staggering 58% increase compared to 2023. Additionally, the firm recorded 48 retail bankruptcies in the U.S., including automobile dealerships, up from 25 the previous year.
This week, Joann, a craft and fabric chain, filed for Chapter 11 bankruptcy protection for the second time this year, seeking a new buyer while managing 800 stores nationwide.
In the coming month, analysts will closely evaluate retail earnings reports for a deeper understanding of consumer sentiment. Some retailers have already begun revealing insights; for instance, Signet Jewelers Ltd. adjusted its fourth-quarter sales forecast downward due to disappointing holiday performance, as customers leaned towards lower-priced options.
Conversely, Target, which faced sluggish sales leading into the holiday period, recently raised its outlook for comparable sales in the fourth quarter after reporting stronger-than-anticipated performance in November and December. Comparable sales are tracked from existing digital and store channels.
Retailers are also assessing how to adapt to potential tariffs proposed during the Trump administration. Executives from Walmart and Best Buy have warned that higher costs may need to be passed onto consumers.
Tony Spring, CEO of Macy’s, highlighted during the NRF conference that the retailer had previously diversified its sourcing in anticipation of tariffs threatened back in 2016 and 2017 and is revisiting those discussions now. He emphasized the desire to maintain fair trading relationships while also ensuring a competitive market.
