Retail sales not as hot as first thought

INDICATOR: December Retail Sales, Consumer Prices and Earnings

KEY DATA: Retail Sales: +0.4 percent; Less Vehicles: +0.4 percent; Internet: +1.2 percent/ Prices: +0.1 percent; Excluding Energy: +0.3 percent; Gasoline: -2.7 percent/ Hourly Earnings: +0.3 percent; Inflation-Adjusted: +0.2 percent

IN A NUTSHELL: “It doesn’t look like all the stories of massive consumer holiday spending tell the full story as retail sales rose only moderately in December.”

WHAT IT MEANS: It looked like households went wild during the holiday season, buying up everything they could. Well, maybe not. Yes, retail sales increased in December, but the pace was nothing special. We did buy a lot of things online and while shopping, families dined out. They also spent like crazy at supermarkets, probably stocking up for all the bad weather. Love that French toast, so sales of eggs, milk and bread were probably off the charts. And the December weather may have also led the sharp increase in spending at home stores. But sales of vehicles were soft and we didn’t go to the electronics and appliance big boxes often. This report points to decent but not great December shopping.

Households did benefit from limited increases in prices. The Consumer Price Index ticked up slightly in December, but the headline hides some of the real issues. There was a sharp drop in gasoline prices and anyone who has been to the pump lately knows that has turned dramatically. While apparel costs continue to decline, there were solid to even sharp increases in a variety of other goods, including vehicles, medical goods and services, Food prices were up moderately, though there was a surge in the costs of cookies. I guess it is time to diet again. For those trying to drown their sorrows, alcoholic beverage prices also jumped. Shelter costs also continued to increase moderately, and that is a third of the average budget. Over the year, consumer prices are rising a little faster than the Fed’s 2 percent target, though it remains slightly below it when food and energy are excluded.

With consumer prices up modestly and hourly wages rising more solidly, real, or inflation-adjusted earnings expanded decently in December. Still, over the year, real earnings are up a meager 0.4 percent and even if you add in the added hours worked, they have risen

only 0.8 percent. Spending is outpacing income and that is an issue as the savings rate is near levels that in the past have signaled a major consumer slowdown. It is hard to sustain strong spending growth when purchasing power is

up so little.

MARKETS AND FED POLICY IMPLICATIONS: Investors are focused on the tax cuts and earnings and those two factors look pretty good. But they should be looking toward the future more and while bottom line, aftertax earnings will be good this year, there are some questions about top-line numbers. With most of

the household tax reductions going to upper income households, it is not clear that consumption will rise significantly this year. The soaring cost of energy is not likely to end soon and that will further restrain household purchasing power. And with the savings rate so low, the lower and middle income tax cuts could go to paying off credit card

and loan payments, not necessarily new spending. Growth this year will be aided by more business spending, but will government spending be slowed in order to balance the massive increase in the deficit that will result from the tax bill? I have seen estimates that run close to $1 trillion. Is that politically palatable or will we see a push to

cut spending? The economy was restrained for most of this decade by flat or declining federal spending and if that is repeated, it will be hard to sustain the solid growth we saw in 2017 and is expected in 2018. But the Fed is more focused on inflation and the latest numbers are hardly threatening. With energy prices rising, I suspect the headline number will start accelerating again and that will be a concern, but just not right now.