Amid worries about the omicron variant and rising prices, consumers evidently engaged in a spell of retail therapy in January, pushing retail and food services sales higher by 3.8% over the month, according to the Census Bureau, the strongest gain since last March, a time when stimulus checks were still being distributed.
December sales, however, were revised lower from negative 1.9% to negative 2.5% from November sales, and there are downside risks to future retail sales given waning consumer sentiment, higher prices and a drawdown of excess savings.
The report comes with an added caveat that nonseasonally adjusted monthly sales tend to decline by roughly 20% in January, and even more in categories such as general merchandise, by 35%, and nonstore retailers, by 28%.
Seasonal adjustments have been challenging to estimate since the pandemic began due to the arrival of sizable but intermittent government stimulus checks, and due to choked supply chains delaying the availability of certain goods, in particular automobiles, furniture and electronics. Compared to last year or to pre-pandemic levels, sales are still strong, but the headline figure in this month’s report warrants some caution.
One trend that reemerged in January is an oversized shift to e-commerce due to rising COVID cases. While online sales have outpaced traditional brick-and-mortar sales for more than two decades, momentum has picked up when fears of catching COVID are at their highest.
Sales from nonstore retailers grew by 14.5% in January on a seasonally adjusted basis and, compared to pre-pandemic levels, are up roughly 43%percent — more than any of the major categories.
As COVID cases are now falling sharply and restrictions are being lifted across much of the nation, we will likely see growth in online sales moderate and shoppers return to in-person retail, as well as to food services, sales of which fell by 0.9% over the month and remain 55% below pre-pandemic levels.
Other strong gains in January, such as of household furnishings which grew by 7.2%, building materials which grew by 4.1% and general merchandise which grew by 3.6% suggest that store shelves are being restocked after the holiday season, allowing purchases to resume.
Sales of motor vehicles and parts grew by 5.7% in January, with supply easing somewhat from what have been notable shortages of semiconductors and other electronics that go into automobile production.
While spare inventories have given auto dealerships outsize pricing power, the increase in sales this month is not entirely attributable to rising prices. In a separate report, the Bureau of Economic Analysis announced that January light vehicle sales ballooned to 15 million from 12.5 million in December on a seasonally adjusted annual rate, marking the sharpest increase since May 2020, soon after many households received their first pandemic-era stimulus checks.
Overall, there is little, if any, evidence that inflation altered the composition of retail sales in January. Sales of nondiscretionary goods, such as groceries, which rose by 1.1%, and health and personal care, which fell by 0.7%, are more likely to see gains in an inflationary environment.
Core retail sales, which exclude autos, gasoline and building materials, help determine economic growth estimates. The January report shows this indicator posting a 4.8% gain in the month, the strongest in almost a year, suggesting that estimates for gross domestic product growth in the first quarter will be revised higher.
What We’re Watching …
The second estimate of economic growth in the fourth quarter of 2021 is set to be released on Thursday. Expectations are for the number to be revised higher from its 6.9% preliminary release on stronger-than-expected consumer spending.
This is to be followed on Friday by data on personal incomes and outlays for the month of January. With the omicron variant spreading across the nation, we would have expected spending to have pulled back a bit, but the retail sales release put the lie to that. This update should provide some insight into whether consumers have started making the shift into spending on services as, apart from spending at bars and restaurants, these are not reflected in the retail sales report.
The update should also provide an estimate of inflation in the personal consumption expenditures index, which could top 6% over the year, with the core index — the Federal Reserve's preferred measure of inflation — accelerating to 5%, the fastest rate in about four decades.