Consumer Demand Remains Strong
U.S. retail sales increased in December, signaling strong consumer demand and reinforcing the Federal Reserve’s cautious approach to cutting interest rates this year. According to a Commerce Department report released on Thursday, retail sales rose 0.4%, following an upwardly revised 0.8% gain in November.
Economists had forecast 0.6% growth, but despite falling short of expectations, the report suggested continued economic resilience. Retail sales climbed 3.9% year-over-year, reflecting robust consumer activity despite concerns over inflation and potential trade policy changes under the incoming Trump administration.
Key Drivers Behind Retail Sales Growth
Several categories saw notable increases in December:
- Auto sales rose 0.7%, continuing momentum from November’s 3.1% jump.
- Furniture store sales surged 2.3%.
- Clothing retailers rebounded with a 1.5% gain.
- Sporting goods, hobby, musical instruments, and bookstores saw a 2.6% rise.
- Miscellaneous store retailers, including gift shops and florists, recorded the largest increase at 4.3%.
However, online sales rose just 0.2%, and restaurant and bar sales—often a measure of household financial confidence—fell 0.3%, possibly impacted by freezing temperatures.
Tariffs and Trade Policy Uncertainty
Sentiment surveys suggest some consumers may be accelerating purchases in anticipation of higher tariffs under President-elect Donald Trump. However, data from the Bank of America Institute showed “little evidence” that tariff concerns were significantly driving purchases.
Higher tariffs on imported goods could raise inflationary pressures, disproportionately affecting lower-income households, according to Oxford Economics’ Michael Pearce.
Core Retail Sales and Economic Growth
Excluding automobiles, gasoline, building materials, and food services, core retail sales surged 0.7%, after a 0.4% increase in November. This figure closely tracks the consumer spending component of GDP, prompting economists to raise their Q4 GDP estimates.
- Consumer spending is estimated to have grown at a 3.3% annualized rate in Q4, down slightly from 3.7% in Q3.
- Capital Economics raised its Q4 GDP forecast to 2.9% from 2.7%, reflecting stronger-than-expected retail activity.
The economy expanded at 3.1% in Q3, well above the 1.8% rate the Fed considers non-inflationary.
Labor Market Strength Continues
The strong labor market remains a key driver of consumer spending:
- The U.S. unemployment rate fell to 4.1% in December from 4.2% in November.
- Initial jobless claims for the week ending January 11 rose 14,000 to 217,000, slightly above expectations, but layoffs remain low.
“The job market should remain sturdy in 2025,” said Stuart Hoffman, chief economic advisor at PNC Financial. However, he warned that immigration restrictions under the new administration could limit the labor supply.
Fed’s Interest Rate Policy Remains Cautious
Despite cooling underlying inflation, consumer prices rose at their fastest pace in nine months, supporting the Federal Reserve’s decision to hold off on immediate rate cuts.
Carl Weinberg, chief economist at High Frequency Economics, stated, “No one can make a case that the Fed needs to cut rates urgently based on this retail sales report. The economy is already at full employment, and monetary stimulus is not necessary.”
The Fed’s benchmark interest rate remains at 4.25%-4.50%, after 100 basis points of cuts in 2024. However, Fed Governor Christopher Waller suggested that further rate reductions could come sooner than expected if inflation continues to ease.
Financial Markets React
Following the report:
- U.S. Treasury yields fell, with the 10-year yield at 4.615%.
- The U.S. dollar slipped against a basket of currencies.
- Wall Street stocks traded lower, reflecting uncertainty over future economic conditions.
Outlook: Strong Economy, But Risks Remain
With resilient retail sales and a tight labor market, the U.S. economy remains on solid footing heading into 2025. However, risks such as potential trade tariffs, inflationary pressures, and geopolitical uncertainty could weigh on future consumer spending.
The Federal Reserve will continue to monitor economic data before making any moves on interest rates, while investors and policymakers alike remain focused on whether growth can be sustained without fueling inflation.
