Monthly Economic Review: February-March 2019

December retail sales were disappointing, but are the estimates believable?
MER Feb-March 2019

With the labor market so strong and incomes increasing, it is difficult to believe numbers reported by the U.S. Census Bureau that indicated consumer spending collapsed in December. The Census Bureau — reporting its numbers a month late because of the government shutdown — said December retail sales grew only 2.3 percent year over year, despite reports from some individual retailers that sales had grown twice as much. That left NRF’s calculation — which is based on Census data but leaves out automobile dealers, gasoline stations and restaurants — at only 0.9 percent year-over-year growth despite gains of 5.7 percent in October and 5.1 percent in November. Certainly, the ongoing trade war with China, the resulting stock market volatility and the shutdown that began just before Christmas were all expected to weigh on December’s results, as did the Federal Reserve’s interest rate hike that month. And there is little doubt that the economy has entered 2019 with less momentum than previously expected. But did retail sales truly collapse? It might be the numbers are an anomaly resulting from the delay in data collection and how seasonal adjustment factors were applied.

The labor market in January surprisingly picked up where it left off in December. Employment gains exceeded expectations for a second consecutive month, notwithstanding the government shutdown. Employers added 304,000 jobs, almost twice as high as the consensus forecast. While we expected a reduced pace in January to offset the surge in December, December’s figures were sharply revised upward to 222,000 with the usual monthly and annual benchmark revisions. Nonetheless, job growth averaged an impressive 241,000 positions over the past three months, making it hard to argue that the economy is faltering with job gains so strong. As job growth remains strong, wage gains are accelerating at the fastest pace of this expansion. Wage growth as measured by private average hourly earnings and the Employment Cost Index’s numbers for wages and salaries have both risen by 3 percent. Stronger wage growth will allow consumers to continue to be the key driver of economic activity.     

The seasonal adjustment process used in reporting monthly retail sales may have compounded December’s dip in retail sales data. The government adjusts retail sales data to smooth out huge changes from month to month and provide a clearer picture of sales trends. It should be noted that December is the biggest month of the year for consumer spending and thus when Census released December’s figures, they were seasonally adjusted by applying the largest seasonal factor. Consequently, the weaker December spending was amplified downward. Correspondingly, a rebound in retail spending in January will be helped by the seasonal adjustment process, which can magnify the unadjusted results. With the temporary factors behind us and the Fed currently on pause from raising interest rates, better retail numbers in January and February may ease concerns about the state of the consumer and the economy.    

Accordingly, we need to wait for a more complete picture of the economy and its direction. There is a backlog of data due to the shutdown, to the point that the Census Bureau has yet to announce when January retail sales figures and December revisions will be available. More insight on December personal income and outlays along with January personal income will be available on March 1, when the Bureau of Economic Analysis releases its reports, which have also been delayed by the shutdown. It will be interesting to see if and how much consumer spending on services took a pass at the end of 2018. January personal spending data will not, however, be included. The shutdown will also delay Census’ annual revision of retail and food services data that is typically released in April every year.

Download this month's report, which includes the following charts and highlights:

  • Consumer sentiment
  • Employment
  • Job openings and hires
  • Inflation
  • Wages and salaries
  • Leading Economic Index
  • Consumer credit
  • Financial market conditions