By Lucia Mutikani
WASHINGTON (Reuters) -U.S. retail sales increased more than expected in December, boosted by motor vehicle and online purchases, keeping the economy on solid ground heading into the new year.
The upbeat report from the Commerce Department on Wednesday, which prompted economists to upgrade their economic growth estimates for the fourth quarter, cast further doubt on financial market expectations that the Federal Reserve would start cutting interest rates in March.
It followed data this month showing strong employment and wage gains in December as well as a pick-up in consumer prices. Fed Governor Christopher Waller on Tuesday described the economy as “doing well,” which he said was giving the U.S. central bank “the flexibility to move carefully and methodically,” in terms on monetary policy.
“Households have continued to weather high interest rates and October’s resumption of student loan payments,” said Will Compernolle, macro strategist at FHN Financial in New York. “While there are some signs of rising distress in credit card delinquencies, we see no strong evidence so far that the economy started 2024 on the verge of a downturn.”
Retail sales rose 0.6% last month after an unrevised 0.3% gain in November, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales gaining 0.4%. Retail sales are mostly goods and are not adjusted for inflation. Sales increased 5.6% year-on-year in December.
The almost broad rise in sales was led by online retailers, where sales advanced 1.5%. Shopping has moved to online and away from the traditional brick-and-mortar retailers, a trend that accelerated during the COVID-19 pandemic.
Receipts at motor vehicles and parts dealers accelerated 1.1%. Sales at building material and garden equipment outlets rose 0.4%. Receipts at sporting goods, hobby, musical instrument and book stores gained 0.3%. Clothing store sales jumped 1.5%.
Sales at food services and drinking places, the only services component in the report, were unchanged. Economists view dining out as a key indicator of household finances.
But sales at electronics and appliance outlets slipped 0.3%, likely the result of discounting. Furniture store sales fell 1.0%. Gasoline station receipts fell 1.3%, as gasoline prices fell about 19 cents a gallon in December, according to data from the U.S. Energy Information Administration.
STRONG CORE SALES
Households have maintained a healthy pace of spending, thanks to a relatively strong labor market. Though spending has cooled from the third quarter’s brisk rate, it has been enough to keep a much-feared recession at bay.
With the Fed expected to start cutting interest rates this year, most economists are confident that the economy will avoid a downturn. The central bank has hiked its policy rate by 525 basis points to the current 5.25%-5.50% range since March 2022.
Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.8% last month. The so-called core retail sales measure corresponds most closely with the consumer spending component of GDP.
November core sales were revised higher to show them rising 0.5% instead of 0.4% as previously reported. Economists now believe consumer spending, which accounts for more than two-thirds of U.S. economic activity, likely increased at about a 2.7% annualized rate in the fourth quarter. That was up from the around 2.0% pace most estimated before the report.
Growth estimates for the overall economy are currently exceeding a 2.2% rate. The economy grew at a 4.9% pace in the third quarter.
The government is scheduled to publish its first estimate of GDP growth for the October-December quarter next Thursday. Some of the anticipated slowdown in GDP growth will likely reflect smaller inventory accumulation relative to the third quarter’s size.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)