December Retail Sales Report Craters Q4 GDP Growth Estimates

December Retail Sales - The Retail Disaster

The retail sales report from December was a disaster. Good news is this report was from December and we are already in February, so it’s very delayed. 

At this point, we already know all the retailers did and investors have utilized private estimates to understand the holiday season. Investors are now focused on the rest of 2019.

We have no proof that there was a mistake in the data collection. But it’s interesting that during a shutdown the report wildly differed from private estimates. It also doesn’t make sense because the labor market is generating accelerated real wage growth. 

One other point which discounts this terrible report is that this holiday season was elongated. The extra week between Thanksgiving and Christmas helped boost sales in November at the behest of December. Black Friday was amazing. But December wasn’t as good according to some retailers.

December Retail Sales - Headline Details Of The Report

The report was bad every way you look at it. On a month over month basis headline retail sales growth was -1.2% which missed estimates for 0.1% growth. November reading was revised down from 0.2% growth to 0.1% growth.

As you can see from the chart below, retail sales ex-autos were -1.8% month over month. 

This was the worst reading since September 2009. Consensus estimate was for no growth. The November reading was revised from 0.2% growth to no growth. 

Excluding autos and gas, sales fell 1.4% month over month which missed estimates for 0.4% growth. This was hurt by the decline in gas prices. The prior reading was 0.5% growth. Finally, the most important metric, which is the control group, saw sales fall 1.7% month over month. This was way below estimates for 0.4% growth and the prior report which had 1% growth.

December Retail Sales - Effect On Q4 GDP Growth

This report and the inventories report, which showed inventories fell 0.1% month over month instead of growing 0.2%, caused GDP estimates to crater. 

Obviously, when I said Q4 GDP growth would be from 2.3% to 2.8%, I didn’t know the retail sales report would be a disaster. This economy is highly reliant on the consumer because business investment has been weak recently.

Barclays’ Q4 GDP tracking estimate fell 0.7% to 2.1%. Morgan Stanley’s estimate for growth fell from 3.7% to 3.1%. They stated their estimate for Q1 tracking could come in as low as 1%. UBS cut its Q1 tracking forecast to just 0.4%. They stated, “"The fall in consumption (in Dec) is worrisome and reflects greater weakness in the household sector."

I don’t know if it’s fair to assume Q1 will be weak just because of one bad retail sales report as the November report was good. The CNBC rapid update as of February 14th shows the median of 11 estimates expects 2.4% growth.

As you can see from the chart below, the Q4 Atlanta Fed GDP Nowcast fell from 2.7% to 1.5%. 

Retail sales and retail inventories reports caused the Q4 estimate for real personal consumption growth to fall from 3.7% to 2.6%. The Nowcast estimate for the contribution of inventory investment fell from -0.27% to -0.55%. 

Ultimately, inventory has no effect on long term growth, but it does affect each report. When inventories are built too much it’s bad. When demand growth inspires inventory to be built, it’s good.

December Retail Sales - Specifics Of The Report

The only 2 positive categories were vehicle dealers and parts and building materials which were up 1% and 0.3%. 

Building materials not being part of holiday shopping might explain why they were up. Sporting goods sales were down 4.9%. Miscellaneous retailers had a decline of 4.1%. 

Even non-store retailer sales were down 3.9%. As of Q3, 9.8% of retail sales were online. The percentage might have a rare drop in Q4 because of these poor results. Sales at apparel stores fell 0.7% and sales at department stores fell 3.3%. Sales at restaurants were down 0.7% which was 2nd straight monthly decline. 

Gasoline sales fell 5.1% because prices fell. That was expected and isn’t worrisome. However, without gas the numbers were still putrid. Year over year retail sales growth fell almost 2% to just 2.3%. That’s the lowest reading since late 2016.

December Retail Sales - Takeaways

If you believe these numbers, it looks like the economy is headed towards a recession. 

However, it could be an anomaly because of the government shutdown. It’s interesting because consumer sentiment fell further in January. I wonder if that means retail sales will be even worse in the next report.

Furthermore, the Redbook same store sales report was extremely strong in December, while it decelerated in January and February. 

Does that mean retail sales will get even worse in the next two months or does it mean these two data points are completely uncorrelated? 

December Retail Sales - This retail sales report doesn’t jive with the strong BLS and JOLTS reports. 

The crashing stock market could have hurt the upper classes’ spending at a time where people are usually buying last minute Christmas presents.

Personally, I never change my mind based on one data point that can be revised. However, I am on alert for the next report. I will also be following consumer sentiment, jobless claims, and the Redbook same store sales reports closer. I am also even more interested to see the December Personal Income and Outlays report and the January Personal Income Report which come out on March 1st.

December Retail Sales - Conclusion

Many are slightly more concerned about the economy now after this report than we were prior to it. 

However, I still think growth will rebound in the 2nd half of this year. Economists are too negative on Q1 GDP growth, but the stock market is too positive on the economy. 

It’s amazing to see economists barely expecting any growth in Q1 partially based on a report from last quarter while stocks are acting as if that report doesn’t matter now because it is far in the past. I think the truth is somewhere in the middle.

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