December retail sales surge

January 17, 2024

Retail sales rose 0.6% in December, double the 0.3% pace in November and well above market expectations. Vehicle sales jumped 1.1% during the month, as dealer lots were restocked in the wake of the UAW strike. Vehicle sales have been trending up since September 2021, as supply chain disruptions were resolved but remain well below the peak in April 2021. Sales for the year were nearly 10% below the level hit in 2019. New vehicles have become increasingly unaffordable and are now considered a luxury purchase, dominated by consumers in the top two income quintiles. All-cash sales have surged over the last year, as buyers who could circumvented surging financing costs. Less affluent buyers have moved into the used vehicle market, where loans have been extended in duration to keep them affordable as rates surged.

Sales excluding motor vehicles and parts rose 0.4% in December, also double the 0.2% pace of November. Gains at traditional department stores, clothing stores and online outperformed big-box discounters. Spending at furniture and housing-related furnishings remained weak along with spending on appliances. That reflects the drop in home sales we saw in the fourth quarter as mortgage rates soared.

Spending at building material and garden stores picked up a bit, along with builder optimism. Applications for mortgages and inquiries to list homes accelerated in December, as mortgage rates dipped below 7%. Builder optimism actually increased during the month after tanking earlier in the quarter. Builders are offering mortgage buy-downs and moving downscale to meet the pent-up demand for homes by first-time buyers. Millennials are aging into their prime home-buying years. Many are turning to their parents, who have either paid off their mortgages or locked into ultralow rates to help fund their downpayments. That is an intergenerational wealth transfer, which has become much more common in the post-pandemic economy.

Spending at grocery stores slightly outpaced inflation during the month, while spending at restaurants flatlined. We saw a surge in spending at restaurants and bars in November and essentially held onto that strength in the final month of the year. Event planners are backlogged with weddings that were delayed during the pandemic competing with corporations for venues. The plane I was on to a resort location over the Martin Luther King holiday weekend was packed with groups traveling to a destination wedding.

Core retail sales, which feed directly into the calculation of real GDP growth, surged 0.8% in December. That sets us up for a strong first quarter and suggests the consumer is still alive and well. Non-store sales accounted for more than half of those gains. Consumer spending ended the year on a strong note; it looks like it increased at an estimated 2.7% pace in the fourth quarter, only a modest slowdown from the pace of the third quarter.

Retailers ordered conservatively for the holiday season. Today's data confirm our view that retail inventories continued to shrink and were the major drag on overall growth in the fourth quarter.

Real GDP now looks like it rose 1.5% in the fourth quarter, a sharp slowdown from the 4.9% pace of the third quarter, but almost entirely due to a sharp drop in inventories. Business investment was lackluster but still posted modest gains on a fourth-quarter-to-fourth-quarter basis. That is a better measure of momentum than the annual average and is more than triple the pace of 2022.