US Retail Sales Drop 1.1% In December: What Investors Need To Know

U.S. retail sales slumped in December, as inflation and rising interest rates continue to weigh on U.S. economic growth.

What Happened? On Wednesday, the Commerce Department reported U.S. retail sales dropped 1.1% on a monthly basis in December to $677.1 billion, missing economist estimates of a 0.8% decline. The Commerce Department also revised its November monthly retail sales growth estimate lower from a 0.6% drop to a 1% contraction.

December retail sales were up 6% from a year ago.

Related Link: S&P 500 Makes Weekly Gains As Inflation Cools: What's Next For The Market?

Why It's Important: The Federal Reserve is attempting to navigate a balancing act of raising interest rates to bring down inflation that reached 40-year highs in 2022 without tipping the U.S. economy into a recession. The Fed is expected to raise interest rates by another 0.25% on Feb. 1, bringing its target fed funds rate up to between 4.5% and 4.75%.

Up to this point, the economy has remained resilient, but slumping retail sales are the latest red flag that Fed tightening is weighing on consumers and companies.

Related Link: Why Morgan Stanley Says S&P 500 Could Drop 23% To New Lows

Fortunately, investors also got some good news on Wednesday on the inflation front. The Labor Department said the producer price index (PPI) dropped 0.5% in December, more than the 0.1% decline economists had expected.

Jamie Cox, managing partner at Harris Financial Group, said Wednesday that the economic data continues to confirm that inflation is declining.

"The question now is whether the economy can weather the sharp increase in rates to tackle inflation," Cox said.

"At a minimum, there will be a profits recession, and that will keep stocks in check until that plays out."

Benzinga's Take: The combination of both retail sales and PPI falling more than expected sent the SPDR S&P 500 ETF Trust SPY trading higher by 0.3% in premarket trading as investors are still hoping the Fed can navigate a so-called "soft landing" for the economy. The sooner the Fed gets inflation back down near its 2% long-term target, the sooner it will be able to pivot from rate hikes to rate cuts, which typically stimulate the economy and the stock market.

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