Ice cold Ice cold\images\insights\article\ice-glacier-lagoon-small.jpg February 16 2024 February 16 2024

Ice cold

Dismal retail sales in January cap a weak holiday spending season.

Published February 16 2024

Bottom line

Retail sales plunged in January, due in part to brutal weather, a downward revision of December’s retail sales results and a substantially lower annual Social Security inflation adjustment. The disappointment caps the weakest Christmas season in five years. It seems the U.S. consumer—particularly at the lower end of the income and wealth spectrum—is becoming stressed. 

The gory details Retail sales in January declined by a much weaker-than-expected 0.8% month-over-month (m/m), well below consensus expectations for a 0.2% decline. The Commerce Department revised December down from a 0.6% gain to a 0.4% increase. November was unrevised at breakeven, and the final print in October was a decline of 0.3%. 

Control results, which strip out food, autos, gas and building materials (and feed directly into quarterly GDP calculations), also plunged. It logged a less-than-expected decline of 0.4% m/m in January, far below the consensus call for a gain of 0.2% and gains of 0.8% in December, 0.2% in November and 0.1% in October.

Weak holiday spending January’s dreadful results neutralized a relatively strong December and were more in line with the poor October and November. Christmas (October through January) spending overall was relatively soft, rising only 2.9% year-over-year (y/y) from 2022’s relatively strong 7.2% gain. This 2.9% increase marks the weakest holiday spending since 2018’s tepid 2.6%. This blue Christmas was not unexpected. The National Retail Federation (NRF) forecasted 3-4%, and we at Federated Hermes expected a 2-3%. 

Why is Christmas a 4-month retail holiday? Most retailers begin to aggressively promote Black Friday deals in October, which pulls some Christmas sales forward into Halloween. November and December are the prime holiday shopping months, and January accounts for about two-thirds of post-holiday gift-card redemptions, which only count as a retail sale when they’re redeemed, not when  purchased. The NRF estimates that $30 billion in gift cards were purchased this holiday season, though half of U.S. adults neglect to redeem their gift cards. Nearly 90% of gift-card recipients spend 20% more than their gift card’s value when they do redeem them. 

Weather or not? Much of the country experienced icy weather in January. Heating bills for oil, natural gas and electricity were much higher than normal, leaving less disposable cash for discretionary spending. Fewer people ventured outside to shop. We expected that online purchases would pick up the slack, but they did not, declining 0.8% m/m

In its January employment report, the Labor Department reported that 553,000 workers couldn’t work because of the brutal elements, a 3-year high. The average number over the last 2 decades is 392,000, meaning January 2024 was 41% worse.

Social Security benefits 71 million people (21% of the U.S. population) receive Social Security benefits and their checks increased 3.2% in January due to the administration’s annual cost of living adjustment (COLA). That’s well below last year’s outsized bump of 8.7%, the largest adjustment in more than four decades to compensate for CPI inflation’s 4-decade high of 9.1% in June 2022. That sizable year-ago number sparked strong retail sales gains in January 2023, and we expected this year’s more modest one would contribute to softer growth. 

Consumer stress increasing Over the past 18 months, the personal savings rate has risen from a 17-year low of 2.7% in June 2022 to 3.7% in December 2023, as consumers are spending less and amassing more dry savings powder. In addition, the growth rate in credit card usage has declined sharply, from 17.4% at the end of 2022 to 10% at year-end 2023. Moreover, credit card delinquency rates have doubled over the past two years, from 1.5% at the end of the third quarter of 2021 to 3% at the end of the third quarter of 2023. Finally, excess personal savings have plunged 86% over the past 27 months, from $2.2 trillion at the end of the third quarter of 2021 to $300 billion at year-end 2023. We expect these savings to be fully depleted by mid-year. 

Soft or hard landing? At the beginning of this month, the Atlanta Federal Reserve’s widely followed GDPNow model was projecting strong GDP growth of 4.2% for the first quarter of 2024. But consumer spending accounts for 70% of GDP, and January’s surprisingly weak retail sales “control” decline of 0.4% should drive this estimate down to a level closer to our 1.3% GDP estimate. Given the cumulative weight of the Fed’s efforts to raise interest rates and shrink its balance sheet to fight inflation, the typical leads and lags associated with tightening monetary policy suggest that the economy should begin to slow this year.

Sector details weak; consumer 'needs' versus 'wants' The divergence between weak spending on goods and relatively stronger spending on services continued in January, as sales at bars and restaurants rose 0.7% m/m. Similarly, spending on goods that satisfy a need were stronger than aspirational purchases. For example, grocery store sales rose 0.6% and department store sales increased 0.5%.

But motor vehicles & parts and gasoline sales each plunged 1.7%. With mortgage rates more than doubling over the past year, from 3% to 8%, and with extreme weather, building materials plummeted 4.1%. However, many homeowners have no interest in surrendering their low mortgage rates, so they have opted to stay put and freshen up their existing homes and furniture sales leapt 1.5%. Electronics declined 0.4%, and clothing sales and sporting goods each slipped 0.2%. 

Frugal February? The cold weather has continued in February, and the consumer remains stressed, particularly at the lower end of the wage spectrum. Some consumers could remain on the sidelines this month. But with an early Easter (March 31) this year, we may begin to see a pickup in retail sales toward the end of the first quarter.

Connect with Phil on LinkedIn

Tags Markets/Economy . Equity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Issued and approved by Federated Advisory Services Company