Retail Activity Plunges, Raising Questions About The Strength Of The Economy

Retail sales tumbled by the largest amount in over nine years in December 2018, providing a disappointing end to what was otherwise a strong year for the retail sector. The 2018 holiday season ended up well below expectations, and introduces some fresh concerns about the strength of the economy going forward.

Total sales growth tumbled at the end of the year

The Census Bureau reported this morning (February 14) that total retail sales rose declined 1.8 percent in December on a seasonally adjusted basis from November's levels. This fell well short of consensus estimates of a 0.2 percent gain and marks the largest monthly drop in retail spending since September 2009 (during the early months of the recovery). Year-over-year growth in the retail sector tumbled to 2.3 percent, which marks the slowest pace of growth since the middle of 2016.

A quarter of this decline was driven by a 5.1 percent drop in gasoline sales, as falling prices at the end of the year held down receipts at gas stations. However, there was plenty of weakness throughout this morning's report. Eleven of the 13 major industries reported a decline in December, with only automobile and building material sales increasing to round out the year. Core retail sales, which exclude motor vehicle and gasoline purchases, fell 1.4 percent during the month as year-over-year growth dropped to 2.2 percent.

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Online sales were hit particularly hard in December

December's results bring a stunning conclusion to the 2018 holiday season, which analysts were predicting to be one of the strongest in the post-recession period. Holiday sales, which are total sales from November and December excluding gas, motor vehicle and parts, and restaurant sales, rose just 2.9 percent in 2018, making it the weakest holiday season for growth since 2012. Perhaps even more surprising, non-store (mostly online) retail sales were among the hardest hit during the month, plunging a whopping 3.9 percent.

Headwinds for consumer spending certainly began to emerge at the end of the year, most notably the plunge in equity markets in December and the start of the partial government shutdown. However, key fundamentals such as job growth, wages and consumer confidence remained generally strong. As a result, performance in December is likely not indicative of an ongoing trend.

Behind the numbers

The December retail results caught everyone off guard this morning, and flies in the face of quite a bit of surrounding evidence. Private data from sources such as Mastercard Inc MA reported that 2018 was one of the strongest holiday seasons in years. In addition, almost across the board retailers spoke of the strength in online shopping performance during the holiday season in fourth quarter earnings reports, including Amazon's strong revenue results.

So what to make of this morning's report? December's results may prove to be quite inconsequential in the grand scheme of things. Retail data is often subject to significant revisions, so the Census Bureau may get some updated information in over the next few weeks that shows that December performance was not as bad as reported today. Alternatively, January data could come in strong and reverse most the December decline. Job growth is still strong at the start of 2019, wage growth is accelerating, the government shutdown has been resolved for the time being, and stocks have rebounded, so it is likely that things will be back to "normal" soon enough.

Still, retail is one of the key drivers of freight demand in the economy, so any sign of weakness is worth paying attention to. Strength in the retail sector has been taken for granted as one of the key support areas for freight activity in 2019. If December's results are part of a broader weakening in retail spending trends, it would have significant implications on the outlook for the freight economy in 2019.

Ibrahiim Bayaan is FreightWaves' Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.

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