WASHINGTON, Jan. 18 (Reuters) – U.S. retail sales fell in December with their biggest drop in a year, driven by fewer purchases of motor vehicles and a range of other goods, putting consumer spending and the overall economy on a weaker growth path into 2023.

The second consecutive monthly drop in retail sales, which are mostly goods, is undercutting factory production. Manufacturing output saw its biggest drop in nearly two years in December, while monthly producer prices also plummeted, other data showed on Wednesday.

Widespread signs of declining demand and declining inflation will likely prompt the Federal Reserve to further scale back the pace of its rate hikes next month, but not interrupt monetary policy tightening once the labor market remains tight. The US Federal Reserve is in the fastest rate hike cycle since the 1980s.

“Consumers are likely to cut back at a time of economic uncertainty,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “The trajectory for the economy is weakening and recession risks are increasing for 2023.”

Retail sales plunged 1.1% last month, the biggest drop since December 2021. Data for November was revised to show sales fell 1.0% instead of 0.6% previously reported. Economists polled by Reuters had forecast sales to fall 0.8%. Retail sales rose 6.0% year-on-year in December.

Retail sales are not adjusted for inflation. The sales decline in December was likely partly due to falling commodity prices during the month. Holiday shopping was also brought forward to October as inflation-weary consumers took advantage of discounts offered by retailers.

A cold spell in December probably caused chilled sales in restaurants and bars. Lower gasoline prices, which affected revenues at gas stations, also helped drive down sales. In addition, spending is shifting to services again.

The model the government is using to extract seasonal fluctuations from the data hasn’t fully adapted to the shift toward more front-loaded Christmas shopping since the start of the pandemic, Bank of America economists said.

Even factoring in the disruptions, higher interest rates have increased the cost of credit, which many Americans use to finance commodity purchases, eroding retail sales in recent months.

The Fed’s Beige Book report on Wednesday described consumer spending as “rising slightly, with some retailers reporting more robust holiday sales.” But it added: “retailers noted that high inflation continued to reduce consumer purchasing power, especially among low- and middle-income households.”

Sales at car dealers fell by 1.2%. Receipts at filling stations fell by 4.6%. Online retail sales fell 1.1%. The turnover of furniture stores plummeted by 2.5%. Receipts at hospitality and beverage outlets, the only service category in the retail sales report, fell 0.9%.

Turnover of electronics and appliance stores decreased by 1.1%. There were also declines in sales from clothing stores and in receipts from general merchandise stores. But sporting goods, hobby and musical instrument stores made gains, as did suppliers of building materials and garden equipment.

The Fed last year raised its policy rate by 425 basis points from near zero to 4.25%-4.50%, the highest since late 2007. In December, it forecast an additional 75 basis points of borrowing cost increases by the end of 2023.

Financial markets have priced in a 25 basis point rate hike at the Fed’s Feb. 31. 1 meeting, according to CME’s FedWatch Tool. Stocks on Wall Street fell. The dollar was stable against a basket of currencies. US Treasury bond prices rose.

PRODUCTION OUTPUT FALLS

Excluding cars, gasoline, building materials and food services, retail sales fell 0.7% last month. These so-called core sales fell an unrevised 0.2% in November.

Core retail sales are closest to the consumer spending component of gross domestic product. The weakness in retail sales is likely to be offset by expected gains in services spending. Consumer spending continues to be supported by labor market tightness, keeping wages high.

The unemployment rate is at its lowest point in more than 50 years of 3.5%.

“Consumers have been spending more on services as they move closer to the pre-pandemic ‘normal’ of traveling, eating out and attending live events,” said Will Compernolle, a senior economist at FHN Financial in New York.

With inflation-adjusted consumer spending rising 0.5% in October and flat in November, economists believe growth in total consumer spending in the fourth quarter will exceed the 2.3% annualized rate recorded in the third quarter. quarter.

Gross domestic product growth estimates for the October-December quarter are a staggering 3.5%, also marking the sharpest trade deficit contraction in November since early 2009. The economy grew by 3.2% in the third quarter %. Nevertheless, the economy entered 2023 with less dynamism. Wage growth is slowing and savings are also dwindling.

A separate report from the Fed found that production fell 1.3% in December, the biggest drop since February 2021, and that production in the previous month was much weaker than initially thought.

Most economists expect the economy to slide into recession by the second half of the year, though there are tentative hopes that moderating inflation could discourage the Fed from raising its target rate above the peak of 5.1% it has set. predicted last month.

This would only result in growth slowing sharply instead of the economy contracting.

Inflation continues to ease, with a third report from the Labor Department showing that the producer price index for final demand fell 0.5% in December after rising 0.2% in November.

The government reported last week that monthly consumer prices fell for the first time in more than 2-1/2 years in December.

“The Fed is making progress in the fight against inflation and while it is unclear whether this will ease the Fed, at least it implies that the central bank may not need to become more aggressive in raising rates and tightening rates. liquidity,” said José Torres. , senior economist at Interactive Brokers in Miami.

Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

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