The conventional wisdom that falling oil prices are a catalyst for increased consumer spending took a major hit yesterday (January 14) with the release of the U.S, retail sales number by the Commerce Department. The figures released indicate that retail sales suffered their largest decline in 11 months during December of 2014, falling .9 percent from the previous month. The report also revised down November’s numbers to an increase of only after .4 percent (.6 percent was originally recorded).
Electronics and appliance, clothing, and garden equipment stores, were the weakest performing categories in December 2014. Online sales were also noticeably down.
On the upside, those figures can be interpreted in a somewhat more encouraging manner. If one focuses on “core retail” sales – defined as aggregate retail sales excluding the figures for automobiles and gasoline – instead of general retail sale – sales were up .4 percent last month. Core retail sales, when defined this way, tend to correspond most closely with the consumer spending component of gross domestic product.
However, some industry watchers – like BTIG Chief Strategist Dan Greenhaus – prefer an alternate definition of “core retail” that not only strips out automobile and gas data, but also excludes sales data from building materials and food services. When calculated that way, core retail sales figures were actually down .4 percent in December 2014.
“Importantly, core retail sales – which matter for GDP estimates, declined by 0.4 percent whereas expectations were looking for an increase of 0.4 percent. Needless to say, that is a terrible miss,” Greenhaus told Barrons. “As for the ‘why,’ we are unsure. Job growth was healthy and gasoline prices were considerably lower but based on this data, consumers simply didn’t spend more. As we’ve been arguing in other notes, there’s a fairly strong relationship between disposable incomes and declining gasoline prices. What we’ve been less certain of is the percentage of ‘found’ money that consumers decide to spend. Based on today’s retail sales data, the answer so far is “not much.”
It was a sentiment echoed by many experts this morning – falling gas prices, paired with what was widely thought to be an increasingly strong looking American economy were supposed to push sales.
“We had looked for lower energy prices to continue to boost core sales through December.” one Barclay’s economist told The Financial Times. “However, this morning’s report suggests that pass-through may be less than expected.”
In some sense the widespread shock at the retail numbers released yesterday was somewhat surprising, since the Commerce Department was not the first figures to indicate that the American consumer’s enthusiasm to spend has been somewhat damped of late.
PYMNTS reported earlier this week on the Chain Store Guide’s January 2015 Consumer Spending Report that discretionary spending remained fairly flat throughout the last part of 2014 (despite falling gas prices and an improved labor market), though the consumer spending monitor – which measures the overall spending intentions of U.S. consumers – increased 5.2 points.
“This rise is seen when looking at the change in the percentage of adults that believe the economy is fair or poor” the report said. “[In November] a combined 73.2 percent answered that they believe the economy is fair or poor; [in December] 68.7 percent answered the same,” the CSG’s report noted.
Those number seem to indicate that consumers may be feeling better about the economy, but they aren’t yet willing to spend at a level consistent with their overall optimism, a reality that seems confirmed by today’s official release from the federal government.
The surprise drop off in retail, during what is generally considered retail’s strongest month, may dampen expectations that consumer spending was poised to rise sharply in Q4 2014. There is also some thought among economists that given the retail sales hiccup the Federal Reserve out to delay its first interest rate hike to later in the year as opposed to June when it is currently scheduled for.
However, while no one is reporting satisfaction with today’s numbers, many voices are emerging that do not consider the slowdown in retail spending necessarily indicative of a major concern.
“We don’t think that the decline in retail sales is the start of something pernicious. Admittedly, average hourly earnings also fell in December. But a collapse in activity doesn’t fit with the strength of employment growth last month,” one strategist for Capital Economics told The Financial Times.
Steven Blitz, , chief economist at ITG, concurred, noting that the blip in the December figures may actually more indicate a problem with analysts projections than with the economy.
“Faulty seasonal adjustments from shifts in holiday spending patterns are probably more to blame for the December decline,” said Steve Blitz in New York. “Looking at the last three months, spending is not collapsing.”
Despite reassurances, however, the market remains skittish.
Then again, maybe, this is just the new normal that we all have to get used to.