Spending stronger than headline suggests

January 16, 2025

Retail sales rose 0.4% in December after rising an upwardly revised 0.8% in November. A surge in vehicle sales to their highest level since May 2021 drove those increases, along with sporting goods. Replacement demand due to the hurricanes in late September and early October buoyed those gains. Domestic light truck sales rose to the highest level since 2005, during the peak of the housing bubble. The consumer sentiment survey revealed that consumers were buying ahead of price hikes (tariffs) in December and early January, although it is too early to see those effects in the data.

Retail sales excluding vehicles and auto parts matched the 0.4% pace of overall retail sales, following an upwardly revised 0.8% in November. The holiday shopping season was compressed into December due to the late Thanksgiving. Spending at sporting goods stores stood out, rebounding 2.6% during the month, the strongest gains since July 2023. Spending on clothing jumped 1.5%, the fastest pace since April 2024.

Replacement demand, remodeling and a modest rebound in other housing activity fueled spending on furniture and appliances. Electronics sales continued to grow but at a moderate pace. Big-box discounters won out over traditional department stores. Spending online continued to rise but at a slower pace after soaring in November.

The largest losses occurred in spending at building and garden supply stores, which haven’t really come back with the storms. Spending at restaurants and health and personal care stores took it on the chin. Travel abroad and sharing the holidays with relatives meant we spent more time breaking bread with friends and families at home than at restaurants and bars.

Anecdotal reports suggest that tipping has plummeted in recent years. Eating out has become too expensive a luxury for many.  

The core control group of retail sales, which feeds directly into the GDP calculations, jumped 0.6% during the month. When combined with revisions, the data suggest that consumer spending should rise at close to a 3% annualized pace for the fourth quarter, after adjusting for inflation. That follows a stunning 3.7% gain over the summer.

Real GDP is expected to rise at a 2.2% pace in the fourth quarter from 3.1% in the third quarter.  That should give the Federal Reserve the leeway it would like to cut rates again in March.  The Fed will not front run the new administration on policy shifts. Instead, it will wait and see what happens to inflation when tariffs and curbs on immigration are implemented.