Retail Sales Post Largest Decline in 11 Months

With the job market on a roll and gas prices falling, consumers are spending away, right?

Not so fast. Americans actually cut back on spending last month after shopping freely in November, perplexing analysts who expected strong retail sales in December.

Retail sales fell a seasonally adjusted 0.9 percent from the previous month, the Commerce Department said Wednesday. That's the largest drop since January. Much of the decline occurred because gas station sales retreated sharply due to lower prices. But sales in most other categories also lost ground.

There's no need to worry yet, however. Consumers will likely bounce back in the coming months on the back of healthy job gains and rising confidence. Economists say many temporary factors likely held back sales in December.

Excluding the volatile categories of gas, autos, building materials and restaurants, sales dropped 0.4 percent after rising 0.6 percent in November. Online and mail-order sales fell 0.3 percent, the most since April.

The disappointing figures came after strong sales gains in November, which many economists said may have caused shoppers to pull back last month. And the financial benefit of falling gas prices can also take time to register with consumers. It may take a month or two of persistent savings before consumers begin to spend the windfall.

With hiring still strong, consumer confidence rising, and Americans' household finances in better shape, most economists expect consumers to spend at a healthy pace this year, supporting solid economic growth.

"This isn't the start of a collapse in activity ... as that doesn't fit with the strength of employment growth and consumer confidence," Paul Diggle, an economist at Capital Economics, said in a note to clients. "As such, retail sales will strengthen again before too long."

And holiday retail sales overall, which include both November and December data but exclude gas, autos, and restaurant spending, were the highest since 2011, according to the National Retail Federation and some independent economists.

Still, the stock market was disappointed by the report. The Dow Jones industrial average fell 266 points in mid-day trading.

Economists cited many reasons why sales fell off in December:

• Retailers engaged in heavy discounting to boost shopper traffic, which lowers the dollar value of sales. The government's figures aren't adjusted for inflation. When consumer spending figures adjusted for price changes are released next month, they may paint a better picture of consumers' health, economists said. "Retailers were price discounting early and hard," said Chris Christopher, an economist at IHS Global Insight.
• The holiday shopping season is getting stretched at both ends. Many stores launched the holiday season as early as October and even pulled forward Black Friday promotions days before the traditional Thanksgiving weekend. That likely led to weaker December sales and resulted in the declining importance of a single day within the season. At the same time, gift card sales are not recorded until they're redeemed. Those sales, as a result, may not appear until January.
• While hiring has been healthy, Americans' paychecks aren't getting any fatter. That limits their ability to spend. Average hourly pay slipped in December, the government said last week, and rose just 1.7 percent last year. That's only slightly ahead of the 1.3 percent inflation rate.
• Americans have worked hard to repair their finances since the Great Recession, reducing their debt as a percentage of income back to 2003 levels. Still, they are reluctant to run up their credit cards as they did in the past: Total credit card debt fell in November from the previous month, the latest data available. It is still far below pre-recession levels.

General merchandise stores, a category that includes department chains as well as big-box retailers such as Wal-Mart, said that sales fell 0.9 percent in December, the most in four years. Sellers of electronics, building materials and garden supplies, clothes and sporting goods all reported lower sales.

Restaurants were a rare bright spot with a 0.8 percent increase. Sales also rose at furniture, grocery and health products stores.

Sales at gas stations dropped 6.5 percent in December, the steepest drop in six years.

A gallon of gas costs an average of $2.12 a gallon nationwide, according to AAA. That is near the lowest level in more than five years and down from $2.58 just a month ago. AAA estimates that Americans spent $14 billion less on gas in 2014 than the previous year.

Some of those savings have gone toward purchasing new cars. Auto sales jumped 6 percent in 2014 to 16.5 million, according to Autodata. That was the biggest year for the industry since 2006.

However, purchases slowed in December from the previous month. Auto dealers and auto parts stores reported a 0.7 percent sales drop last month, following a big 1.6 percent gain in November.

Consumers may yet show signs of strength this year. There are nearly 3 million more Americans earning paychecks than a year ago, which ought to bolster spending going forward. The unemployment rate has fallen to a six-year low of 5.6 percent.