Retail Sales Downshift in December

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, January 18, 2023

Trajectory Is Weakening

 The U.S. economy weakened in December. Overall spending in December fell over 1% month over month after a downwardly revised 1% decline in November. Lower sales on autos and at gas stations contributed over half of the decline in total retail sales.

The control-group sales fell 0.7% in December, revealing the economy slowed down in the final month of last year. The control group is the category the Bureau of Economic Analysis uses for gross domestic product (GDP) calculations.

Nominal online retail sales fell 1.1%, as online retailers discounted products to clear bloated inventories.

Investors like to transform this nominal report into an inflation-adjusted estimate that better corresponds to other real economic gauges. Deflated by the Consumer Price Index, real December retail sales fell 0.4% from a year ago, the second consecutive annual decline.

Momentum is slowing as the economy transitions into the new year. Consumers will have less support from surplus savings this year, which increases the risk that 2023 will be a tough year for economic growth. Furthermore, industrial production declined in December and was revised downward for November. However, if the job market does not materially deteriorate, a potential recession should be short and shallow.

A Slowing Trajectory

Consumer spending is slowing but investors need to wait until a more comprehensive spending report is released on January 27. Retail sales focuses mostly on goods, whereas the full spending report includes both goods and services. As shown in the chart below, annual growth rates for both real retail sales and real personal spending have slowed for most of this year.

View enlarged chart


The consumer is feeling the weight of slow wage growth and nagging price pressures. Weak retail sales in December shows consumers are likely retrenching during a time of economic uncertainty. Declining consumer demand and periodic discounting for some goods pushed down control-group sales, the category that directly feeds into the official GDP estimate. The trajectory for the U.S. economy is weakening and recession risks are rising for 2023. However, a potential recession would likely be shorter than average. The weak retail sales report does not change expectations that the Federal Reserve will likely increase rates by 0.25% at the February 1 meeting.


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