Retail sales exceeded expectations

December 14, 2023

Retail sales rose by a stronger-than-expected 0.3% in November, beating expectations for a 0.1% decline. October retail sales were revised lower to -0.2% from -0.1%. The Grinch failed again at his attempts to steal Christmas for those who celebrate. The consumer stepped out and spent, despite a generally dour mood and low assessments of the economy. Inflation has cooled more rapidly than wages, but price levels remain elevated. It takes time to heal and actually feel better about the progress we are now making.

Big-ticket purchases regained ground in November after losses in October. Sales of motor vehicles rose 0.5%, which went against expectations for a decline as total vehicle unit sales fell to 15.3 million from 15.5 million. Typically, unit sales and retail sales of motor vehicles move in the same direction. In November's, it was the mix that matters. There was more selling to retail customers, where profit margins are the largest. The Detroit Big Three were catching up from the strikes and a loss in market share in October.

On an inflation-adjusted basis, motor vehicle sales rose an even stronger 0.6%. That was due to the fact new vehicle prices actually gave up some ground during the month. That doesn't mean vehicles are "affordable." Most new vehicle sales are purchased by those in the top two income quintiles. All cash sales, which few households can afford, have increased to offset the crimp of higher interest rates.

Furniture store sales increased 0.9% despite a mortgage winter having set in. An early thaw may occur given the sharp decline in market yields in response to the Fed’s early Christmas present via its pivot in monetary policy. In late October, the 30-year fixed mortgage rate was over 8%. Now, mortgage rates are edging below 7%, which has been a key tipping point for first-time buyers.

Apparel sales rose 0.6% while sporting goods sales increased 1.3%. Health and personal care store sales rose 0.9% as households sought relief from ailments ranging from the flu, COVID and RSV. Apparel prices were among those that actually declined at their fastest pace since 2020 in November.

The National Retail Federation (NRF) forecast 2023 holiday sales to rise 3-4% from last year. November holiday sales rose 4.3%, tracking above the NRF's projection. The NRF's holiday spending is defined as the months of November and December and excludes sales of automobile dealers, gasoline stations and restaurants. We expect to easily beat those estimates again in December, given the late placement of the Christmas holiday. We still have two more weekends for consumers to shop and stuff their holiday stockings.

Holiday parties drew people out to restaurants and bars as sales at those establishments jumped 1.6%. That is one of the largest increases this year, which has seen consumers spend more on services as well goods.

There were some notable declines in November but not enough to dash away the holiday cheer. Gasoline station sales fell 2.9% but that was largely due to a drop in gasoline prices, which plummeted 6%. General merchandise store sales declined 0.2%, pulled lower by dismal department store sales, which fell 2.5%. Traditional retailers continue to lose ground to the big-box discounters and online retailers. Online sales were firm, rising 1%.

Electronic store sales declined 1.1%. We are not buying many new phones, or computers this holiday season. Those we are purchasing are falling in price.

Core retail sales, which exclude food, autos, building materials and gas station sales, rose a firm 0.4%, outpacing the consensus expectation for +0.2%. Those increases feed directly into the calculation of real GDP for the fourth quarter. Stronger than expected consumer spending will be partially offset by a sharp drawdown in retail inventories. Selection for the holiday season is expected to remain limited.

The economy now looks like it is growing north of 1% in the fourth quarter instead of the less than 1% initially expected for the period. That would bring growth for the year to 2.7% on a fourth quarter to fourth quarter basis, close to what we had for the year. That is more than three times the pace of 2022.