KEY DATA: Sales: -0.9%; Gasoline: -6.5%; Internet: -0.3%/Import Prices: -2.5%; Nonfuel: -0.1%; Exports: -1.2%; Farm: -0.7%

IN A NUTSHELL:  “It doesn’t look like consumers shopped ‘till they were tired, let alone ‘till they dropped in December.”

WHAT IT MEANS:  In the critical holiday shopping season, it doesn’t look like the urge to splurge took hold.  Retail sales fell in December, but that was not a shock.  We knew that vehicle purchases had come down from unsustainable heights to more reasonable levels and gasoline prices had crashed.  These data are not adjusted for prices, so the decline in gasoline purchases was likely a price issue.  But there were weaknesses in other categories.  Electronics and appliance demand, which had been largely going nowhere, turned negative.  You mean everyone didn’t go out and buy a curved screen TV for a couple of grand?  Prices were low but there are no affordable new products that have caught peoples’ attention.  Phone sales seemed to be solid, but I guess not good enough.  The milder winter, at least compared to last year, probably helped create the sharp drop in Home Depot/Lowes type stores.  Households bought less clothing, sporting goods and general merchandise as well.  But we did spend more money on food – both at home and away – as well as on furniture.  That was it.  Not a lot of shopping went on.

On the inflation front, there is none.  Import prices fell sharply as energy drove the decline.  Excluding fuel, costs were off modestly.  Consumer and capital goods costs edged downward while vehicle prices were flat.  Unfortunately, food costs keep rising and that is not good news for the consumer.  On the export side, prices were down pretty much across the board, led by a huge drop in energy and a sharp decline in agricultural prices.

MARKETS AND FED POLICY IMPLICATIONS:  Rising consumer optimism, more jobs and lower energy costs were expected to create a really good holiday shopping season.  It doesn’t look like that happened.  I guess for all those workers who didn’t see any increase in incomes, buying a whole lot more was not in the cards.  We need better wage gains so the 147 million people employed have more money in their paychecks.  That still is not happening, so business people who are disappointed by the economy should keep in mind that if they don’t pay their workers more, their workers cannot spend more.  The other thing to remember is that the additional money left in peoples wallets when they leave the gas station is relatively small.  It takes time for the impact to build up.  Thus, while spending should rise, don’t expect it to surge. So, what do these reports mean for the markets and the Fed?  Investors will not like the retail sales report as it relates to earnings.  But a solid but not robust economy, coupled with no inflation means the Fed can be very patient.  That should assuage some of the angst.  Regardless, I have no idea what is driving investors at any given moment these days and given the volatility, I don’t think anyone does.