US retail sales fall after hefty gains; labor market still tight

  • Retail sales fell 0.6% in November
  • Core sales down 0.2%; October sales have been revised lower
  • Weekly jobless claims fall by 20,000 to 211,000

WASHINGTON, Dec. 15 (Reuters) – US retail sales fell more than expected in November, but consumer spending remains supported by a tight labor market, with the number of Americans filing for unemployment benefits falling the most in five months over the past week.

The biggest drop in retail sales in 11 months, reported by the Department of Commerce on Thursday, was likely a payback after sales surged in October as Americans began their holiday shopping early to take advantage of discounts from companies desperate to to surplus stock.

Economists also noted that commodity prices plummeted in November, which could have weighed on retail sales last month. The rebates by retailers were also likely a drag on the dollar value of sales. Retail sales are mostly goods and are not adjusted for inflation.

“It’s hard to know at this point whether November’s weakness represented a fundamental change in trend or reflected an inevitable cooling after October’s surge in real spending, or a combination of those, but for now we’re not particularly alarmed by the November drop in retail spending,” said Daniel Silver, an economist at JPMorgan in New York.

Retail sales fell 0.6% last month, the biggest drop since December 2021, after an unrevised 1.3% rise in October. Economists polled by Reuters had predicted a 0.1% drop in sales. Retail sales rose 6.5% year-on-year in November.

Last month’s drop in sales also reflected the waning boost from one-time tax refunds in California, where some households received as much as $1,050 in stimulus checks in October, and Amazon’s second Prime Day. Spending is also reverting to services.

“Considering the disinflation of goods and strong spending in October, it’s premature to call this a sign of collapsing consumer demand,” said Will Compernolle, a senior economist at FHN Financial in New York. “Most likely, holiday expenses are earlier this year, due to discounts, availability, and frustration over long shipping delays a year ago.”

Sales at car dealerships fell by 2.3% as there is still a shortage of motor vehicles. Receipts at filling stations decreased by 0.1%, due to lower petrol prices. Online retail sales fell 0.9%, contradicting reports of strong Black Friday sales. The turnover of furniture stores fell by 2.6%.

Hospitality and beverage sales, the only service category in the retail sales report, rose 0.9%. Turnover of electronics and appliance stores fell by 1.5%. There were also declines in receipts at general merchandise stores and sporting goods, hobby, musical instrument and book stores. Turnover of clothing stores decreased by 0.2%.

Nevertheless, the almost general weakness in sales suggests that higher borrowing costs and the threat of a looming recession are negatively impacting household spending. Savings, which have helped consumers fight inflation, are dwindling. The savings rate was 2.3% in October, the lowest since July 2005. But economists also expect falling inflation to support spending.

The Federal Reserve raised its policy rate by half a percentage point on Wednesday and expected an additional 75 basis points in borrowing costs by the end of 2023. This rate has been raised 425 basis points this year from near zero to a Range of 4.25%-4.50%, the highest since late 2007.

Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. US Treasury yields fell.

Retail sales

STRUCTURAL LABOR SHORT

Excluding cars, gasoline, building materials and food services, retail sales fell 0.2%. The data for October was revised down to show that these so-called core sales rose 0.5% instead of 0.7% as previously reported.

Core retail sales are closest to the consumer spending component of gross domestic product. Weakness in retail sales is likely to be offset by gains in the services sector, keeping consumer spending and the overall economy on a subdued growth path this quarter.

The economy grew at an annualized rate of 2.9% in the third quarter, following a contraction in the first half of the year.

Higher interest rates are putting pressure on the manufacturing industry. A separate report from the Fed on Thursday showed that manufacturing output fell 0.6% in November. Conditions in the manufacturing sector, which accounts for about 11.3% of the economy, are likely to remain weak ahead of the new year.

Reports from the New York Fed and the Philadelphia Fed showed that business conditions in New York State and the Mid-Atlantic region remained poor in December. But companies were fairly optimistic about conditions over the next six months.

Empire State and Philly Fed

Despite increasing recession risks as a result of the Fed rate hikes, the labor market remains strong.

A fifth report from the Labor Department showed that initial claims for state unemployment benefits fell by 20,000 to a seasonally adjusted 211,000 in the week ending Dec. 10.

The drop in claims last week was the biggest since July, taking them to a three-month low. Economists had forecast 230,000 claims last week. There were large declines in unadjusted claims in California, New York, Georgia and Texas.

While claims have been up and down in recent weeks, they have remained below the 270,000 threshold, which economists say would be an alarm signal for the job market despite a wave of layoffs in the tech sector.

Unemployment Claims

Companies are generally reluctant to lay off employees as they struggled to find work in the wake of the COVID-19 pandemic, a fact acknowledged by Fed Chairman Jerome Powell on Wednesday.

Powell described the labor market as “extremely tight”, adding “it feels like we have a structural labor shortage there”. In October there were 1.7 vacancies for every unemployed person.

The claims report also showed that the number of people receiving benefits after a first week of aid, a proxy for hiring, increased by 1,000 to 1.671 million in the week ending Dec. 3. the so-called ongoing claims are delayed from previous weeks.

“While employers may be reluctant to lay off employees, they are becoming more cautious about hiring as the economy slows,” said Nancy Vanden Houten, chief economist at Oxford Economics in New York.

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

Our Standards: The Thomson Reuters Principles of Trust.

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