US Retail Sales Show Strong End to 2024; Labor Market Remains Robust

By Lucia Mutikani

WASHINGTON - U.S. retail sales saw an increase in December, as households purchased vehicles and a variety of other goods. This trend indicates strong economic demand and enhances the Federal Reserve's cautious stance on interest rate cuts for this year.

The December report released by the Commerce Department has led some economists to raise their growth estimates for the fourth quarter, bringing them close to the rapid pace experienced in the previous quarter. This follows a recent announcement of significant job growth and a decrease in the unemployment rate to 4.1%, down from 4.2% in November.

Even though inflation showed signs of easing last month, overall consumer prices rose at their highest rate in nine months. The strength of the labor market is boosting consumer spending through increased wage growth.

"No one can argue that the Fed needs to urgently cut interest rates based on this retail sales report," stated Carl Weinberg, chief economist at High Frequency Economics. "There’s no need for monetary stimulus as the economy is already at full employment."

Retail sales rose by 0.4% last month following an upwardly revised 0.8% increase in November, according to the Commerce Department’s Census Bureau. Economists had predicted a 0.6% increase in retail sales, which primarily consist of goods and are not adjusted for inflation, after a previously reported 0.7% rise in November. Year-on-year, retail sales increased by 3.9% in December.

Sales at car dealerships grew by 0.7% after a steep 3.1% rise in November. Sales at furniture stores experienced a 2.3% uptick, while clothing retailers saw a recovery with a 1.5% increase.

Additionally, sporting goods, hobby, musical instruments, and bookstore sales surged by 2.6%. Sales at miscellaneous stores—including gift shops and florists—skyrocketed by 4.3%. However, online sales showed only a minimal increase of 0.2%. Receipts at food services and drinking places, which is a critical service indicator of household finances, fell by 0.3% after a slight rise in November, likely affected by freezing temperatures that kept many consumers indoors.

Meanwhile, sales at building material stores decreased by 2.0%, while higher gas prices led to a 1.5% increase in receipts at service stations.

Consumer sentiment surveys suggest there could be a rush to purchase goods due to anticipated tariffs from President-elect Donald Trump’s upcoming administration. Trump is expected to introduce broad tariffs on imports, which may raise consumer prices.

Despite this, the Bank of America Institute reports that there is little evidence suggesting that consumer concerns over tariffs are driving recent buying behavior.

Core Retail Sales Remain Strong

Retail sales excluding automobiles, gasoline, building materials, and food services jumped by 0.7% last month, following a 0.4% gain in November. These core retail sales closely align with the consumer spending portion of gross domestic product (GDP).

Economists estimate that consumer spending grew at an annualized rate of 3.3% in the fourth quarter after accelerating to a rate of 3.7% in the July-September period. Capital Economics has increased its GDP growth forecast for the last quarter to 2.9%, up from a previous estimate of 2.7%.

The economy expanded at a 3.1% pace in the previous quarter, significantly higher than the 1.8% growth rate that U.S. central bank officials consider sustainable without triggering inflation.

The Fed is not expected to cut rates this month, having forecasted only two reductions for the year ahead, down from four predicted in September when it initiated a policy easing cycle, mainly due to concerns regarding potential risks from Trump’s plans.

Fed Governor Christopher Waller expressed optimism on Thursday that inflation could ease, possibly allowing for rate cuts sooner than anticipated.

Treasury yields dropped following Waller's comments, the dollar weakened against a basket of currencies, and stock indices on Wall Street declined.

Interest rates have been slashed by 100 basis points to a range of 4.25%-4.50%, following a 5.25 percentage point rise in 2022 and 2023.

"Tariffs pose a significant downside risk this year, impacting lower-income households the most," noted Michael Pearce, deputy chief U.S. economist at Oxford Economics. Many low-income households have little to no savings buffer, making them particularly vulnerable. A report from the Labor Department indicated that initial claims for state unemployment benefits increased by 14,000, reaching 217,000 for the week ending January 11, higher than the 210,000 anticipated by economists.

While claims data is known to be volatile at the year's start, it still indicates low levels of layoffs. The rise in claims last week was likely influenced by unusually cold temperatures, leading to increases in unadjusted applications in states like Michigan, Illinois, Ohio, and Missouri.

The Fed's Beige Book report on Wednesday highlighted that employment has "ticked up on balance" in early January, noting challenges in finding skilled workers and infrequent layoffs, although there were expressions of uncertainty regarding future staffing needs in some areas.

The number of people receiving unemployment benefits after the initial claim decreased by 18,000, totaling 1.859 million for the week ending January 4.

Stuart Hoffman, chief economic advisor at PNC Financial, remarked, "The job market should remain solid into 2025", although potential immigration restrictions from the new administration could limit the available workforce.

Retail, Sales, Economy