By Lucia Mutikani
WASHINGTON, Feb 10 (Reuters) – U.S. retail sales were unexpectedly unchanged in December as households cut back spending on motor vehicles and other big-ticket items, potentially setting consumer spending and the economy on a slower growth path heading into the new year.
The Commerce Department also revised down retail sales for October, suggesting consumer fatigue amid rising cost-of-living challenges that have been partly attributed to higher prices due to tariffs on imports. The weak report could prompt economists to trim their economic growth estimates for the fourth quarter.
“Overall, signs of earlier consumer strength may be starting to falter, in line with gloomy sentiment indicators and a falling saving rate,” said Thomas Ryan, North America economist at Capital Economics. “That said, given the expected stimulus as the bigger rebate checks begin to flow, consumption at the end of the first quarter may turn out to be a lot stronger than it currently looks at the start.”
The flat reading in retail sales last month followed an unrevised 0.6% increase in November, the Commerce Department’s Census Bureau said on Tuesday. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise by 0.4%.
Sales increased 2.4% year-on-year in December. October’s monthly sales were revised to show them declining 0.2% instead of 0.1% as previously estimated.
The Census Bureau is still catching up on data releases after delays caused by last year’s government shutdown. Some of the weakness in sales last month likely reflected seasonal adjustment issues around the holiday season. Economists also blamed the 43-day shutdown for the weak sales performance.
Receipts at auto dealerships decreased 0.2%. A further decline is likely in January after manufacturers reported a drop in sales units for the month. Furniture and home store sales fell 0.9% while receipts at electronics and appliance stores slipped 0.4%. Sales at clothing outlets dropped 0.7%.
There were also decreases in sales at miscellaneous store retailers as well as health and personal care stores. Sales at food services and drinking places, the only services component in the report and a gauge of discretionary spending, dipped 0.1%. But receipts at building materials and garden equipment stores increased 1.2%, while sales at sporting goods, hobby, musical instruments and book stores gained 0.4%. Online retail sales edged up 0.1% after being unchanged in November.
Retail had been strong despite consumers being downbeat about the economy amid higher prices from tariffs and a softening labor market. That has come at the expense of saving, with the saving rate falling to a three-year low of 3.5% in November from 3.7% in October. It has dropped from a peak of 31.8% in April 2020. But household wealth has surged, driven by a strong stock market rally and still-high home prices, creating what economists have termed a K-shaped economy.
UPPER-INCOME HOUSEHOLDS SUPPORTING SPENDING
Spending has largely been driven by upper-income households, who have benefited from the higher asset prices, while lower-income households are barely keeping their heads above water amid slowing wage gains.
Retail sales excluding automobiles, gasoline, building materials and food services fell 0.1% in December after a downwardly revised 0.2% gain in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have advanced 0.4% in November.
December’s drop and the downward revision to November’s data suggested consumer spending slowed from the third quarter’s brisk 3.5% annualized growth pace, which drove much of the economy’s 4.4% growth rate during that period. The Atlanta Federal Reserve is forecasting GDP increased at a 4.2% rate in the fourth quarter. The government will publish its delayed advance estimate of fourth-quarter GDP next week.
With wage growth slowing amid a softening labor market and savings running low, consumer spending could slow this quarter, though any downside is likely to be limited by tax refunds.
Wage growth slowed to 0.7% in the fourth quarter, a separate report from the Labor Department’s Bureau of Labor Statistics showed, after increasing 0.8% in the July-September quarter. Wages advanced 3.3% in the 12 months through December, the smallest annual gain since the second quarter of 2021.
Cooling wages restricted the Employment Cost Index, the broadest measure of labor costs, to a 0.7% gain in the fourth quarter after advancing 0.8% in the July-September quarter.
Labor costs increased 3.4% in the 12 months through December, the smallest gain since the second quarter of 2021, which could keep services inflation contained. They rose 3.5% in the year through September.
The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.
The government reported last week that there were 0.87 job openings for every unemployed person in December compared to 0.89 in November. That ratio has dropped from about 1.08 a year ago. Though wage pressures have diminished, tariffs are keeping inflation elevated.
Economists expect the Federal Reserve to hold interest rates steady through the first half of the year. The U.S. central bank last month left its benchmark overnight interest rate in the 3.50%-3.75% range.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )
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