US retail sales stall in December; underlying weakness emerging

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Retail sales unchanged in December

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Core retail sales dip 0.1%; November core sales revised lower

By Lucia Mutikani

WASHINGTON, Feb 10 (Reuters) - U.S. retail sales were unexpectedly unchanged in December as households scaled back spending on motor vehicles and other big-ticket items, potentially setting consumer spending and the economy on a slower growth path heading into the new year. The Commerce Department also revised down retail sales for October, suggesting consumer fatigue amid rising cost-of-living challenges that have been partly attributed to higher prices due to tariffs on imports. The weak report, together with a marginal rise in business inventories, prompted economists to downgrade their economic growth estimates for the fourth quarter.

Frigid temperatures in January could also weigh on spending this quarter. While spending could still ?be supported by expected larger tax refunds as part of President Donald Trump's tax cuts, economists also said some households could opt to save the windfall given labor market sluggishness.

"Overall, signs of earlier consumer strength may be starting to falter, in line with gloomy sentiment indicators and a falling saving rate," said Thomas ?Ryan, North America economist at Capital Economics. "That said, given the expected stimulus as the bigger rebate checks begin to flow, consumption at the end of the first quarter may turn out to be a lot ?stronger than it currently looks at the start."

The flat reading in retail sales last month followed an unrevised 0.6% increase in November, the Commerce Department's Census Bureau said ?on Tuesday. Economists polled by Reuters had forecast retail ?sales, which are mostly goods and are not adjusted for inflation, would rise by 0.4%.

Sales increased 2.4% year-on-year in December. October's monthly sales were revised to show them declining 0.2% instead of 0.1% as previously estimated.

The Census Bureau is still catching up on data releases after delays caused by ?last year's government shutdown. Some of the weakness in sales last month likely reflected seasonal adjustment issues around the holiday ?season. Economists also blamed the 43-day shutdown for the weak sales performance.

Receipts at auto dealerships decreased 0.2%. A further decline is likely in January after manufacturers reported a drop in sales units for the month. Furniture and home store sales fell 0.9% while receipts at electronics and appliance stores slipped 0.4%. Sales at clothing outlets dropped 0.7%.

There were also decreases in sales ?at miscellaneous store retailers as well as health and personal care stores. Sales at food services and drinking ?places, the only services component in ?the report and a gauge of discretionary spending, dipped 0.1%. But receipts at building materials and garden equipment stores increased 1.2%, while sales at sporting goods, hobby, musical instruments and book stores gained 0.4%. Online retail sales edged up 0.1% after being unchanged in November.

Retail had been strong despite consumers being downbeat about the economy amid higher prices from tariffs and a softening labor market. That ?has come at the expense of saving, with the saving rate falling to a three-year low of 3.5% in November from 3.7% in October. It has dropped from a peak of 31.8% in April 2020.

But household wealth has surged, driven by a strong stock market rally and still-high home prices, creating what economists have termed a K-shaped economy. Spending has largely been driven by upper-income households, who have benefited from the higher asset prices, while lower-income households are barely keeping their heads above water amid slowing wage gains.

Stocks on Wall Street

were mixed. The dollar was steady against a basket of currencies. U.S. Treasury yields fell.

CORE RETAIL SALES WERE WEAK

Retail sales excluding automobiles, gasoline, building materials and food services eased 0.1% in December after a downwardly revised 0.2% gain in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have ?advanced 0.4% in November.

December's drop ?and the downward revision to November's core retail sales data suggested consumer spending slowed from the third quarter's brisk 3.5% annualized growth pace, which drove much of the economy's 4.4% growth rate during that period.

The Atlanta Federal Reserve cut its fourth-quarter GDP growth estimate to a 3.7% rate from a 4.2% rate. The government will publish its delayed advance estimate of fourth-quarter GDP next week.

"Many ?households are contending with depleted savings, fewer job opportunities, and slower income growth, all of which are gradually eroding purchasing power," said Gregory Daco, chief economist at EY-Parthenon.

"While larger tax refunds should provide a modest fiscal tailwind in the first half of the year, households are also likely to rebuild savings and pay down credit card balances, limiting upside to consumption in the first quarter."

Wage growth slowed to 0.7% in the fourth quarter, a separate report from the Labor Department's Bureau of Labor Statistics showed, after increasing 0.8% in the July-September quarter. Wages advanced 3.3% in the 12 months through December, the smallest annual gain since the second quarter of 2021.

Cooling wages restricted the Employment Cost Index, the broadest measure of labor costs, to a 0.7% gain in the fourth quarter after advancing 0.8% in the July-September quarter.

Labor costs increased 3.4% in the 12 months through December, the smallest gain since the second quarter of 2021, which could keep services inflation contained. They rose 3.5% in the year through September.

The ECI is ?viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes. Economists expect the Federal Reserve to hold interest rates steady through the first half of the year. The U.S. central bank last month left its benchmark overnight interest rate in the 3.50%-3.75% range.

"This is encouraging news for the Fed, the softer ECI readings reinforce our view that labor costs are no longer a meaningful driver of inflation," said Eugenio Aleman, chief economist at Raymond James.

"They also suggest a ?labor market that is cooling in an orderly way rather than deteriorating sharply, a combination that supports the case for a single, well-timed rate cut later this year." (Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Nick Zieminski)