December Retail Sales, Industrial Production and Producer Prices and Mid-Month Consumer Sentiment

KEY DATA:  Sales: -0.7%; Core Sales: -1.9%/ IP: +1.6%; Manufacturing: +0.9% / PPI: +0.3%; Goods: +1.1%; Services: -0.1%; Sentiment: -1.5 points

IN A NUTSHELL: “The consumer hunkered down, as shutdowns increased and government support faded.”

WHAT IT MEANS:  If the consumer is the heart of the economy, it may be time for to bring out the defibrillators.  Retail sales fell sharply in December after having cratered in November.  The cutbacks were in most categories, but especially those impacted by shutdownsRestaurant demand dropped like a rock, purchases of big-ticket items such as electronics, appliances and furniture were off sharply, department store sales continued to disappear and people even cut back buying food at supermarkets.  Households even slowed their shopping online, which was off significantly.  Gasoline sales rose, but prices drove that increase.  Vehicle demand picked up and households hit the drug stores more heavily.  For some reason that I am not clear about, clothing demand surged.  Maybe it was that winter finally showed up. Excluding automobiles, gasoline, building materials and food services, which most closely mirrors the consumption number in the GDP report, sales fell by nearly two percent after declining by over one percent in November.  Clearly, household hunkered down at the end of last year.

Despite the slowdown in consumer spending, the nation’s manufacturing sector surged in December as output rose sharply.  The expansion was widespread.  Of the eleven durable goods industries, only two (vehicles and computers) posted declines.  Only one of the eight nondurable goods components, paper, contracted. 

Not only is manufacturing output rising, but so is the cost of producer goods on the rise.  The Producer Price Index was up moderately in December led by surging goods prices.  Most of that was in energy, which as we all know, has been soaring.  Excluding energy, producer prices for goods was up minimally.  Good news for consumers came in the form of declining food costs.  While the path from overall producer to consumer prices is hardly direct or clear, that is not the case with food.  Thus, we could see some relief or at least some stability in food prices over the next few months. 

The University of Michigan’s mid-month measure of consumer sentiment eased back, a major surprise given the recent events.  But what is driving the apparent stability in the measure is a vast difference between Democrats and Republicans, with independents stuck smack dab in the middle.  Democrats remain exuberant, Republican are depressed and independents are moderately optimistic.  Will the anger that has been engendered translate into consumer behavior?  That is unclear, but it cannot be a positive.

IMPLICATIONS:  The decline in retails sales is just another indication that government largesse was and needs to continue being the main support for the economy.  As the funding faded in November and December, so did consumption.  With shutdowns and restrictions rising, consumers didn’t do much shopping or eating out or actually buying much at all.  But that could easily turnaround in January as the next round of stimulus checks are going out.  So, if we see a rebound, chalk it up to Uncle Sam opening his wallet and pouring cash into the economy.  And with incoming President Biden proposing a massive new stimulus bill, look for the consumer to resume spending.  The wild card in all this is consumer sentiment.  The myth of a rigged election has been perpetrated on the populace for so long that large numbers of people actually believe it.  That no one has ever explained how a multi-state, multi-million vote fraud was carried out in secret or provided any proof that it actually happened, appears to be irrelevant.  Indeed, fraud was never mentioned in any of the lawsuits objecting to the vote counts.  But if you build it they will come and the big lie about the big steal was built and continues to be built.  How we get over this I don’t know, as large numbers of people, including politicians, are unwilling to admit that the election was fair and Biden won it. As a result, the resentment will fester and that cannot be good for anything, especially the ability to move critical programs through Congress.  And as the data clearly show, that is needed.