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Retail sales sink 1.2% in December to mark biggest drop since 2009 as holiday season fizzles out

Published: Feb 14, 2019 8:34 a.m. ET

Sales fall for most retailers, delayed government report indicates
By JEFFRY BARTASH
REPORTER

Bloomberg News/Landov
The holiday shopping season turned out to be a bust, according to the government’s long-delayed report on December sales.
The numbers: Sales at U.S. retailers fizzled in December and posted the biggest decline in nine years, according to a long-delayed government report.

Retail sales sank 1.2% in December, the U.S. Census said Thursday. It’s the largest drop since September 2009, a few months after the end of the Great Recession.

Economists polled by MarketWatch expected sales to be flat.

What happened: Sales fell in every retail category except auto dealers and home centers. Auto sales rose 1% and home-center sales edge up 0.3%.

Now the bad news. Sales fell 5.1% at gas stations, but that was not unexpected. Gasoline prices have been falling since last fall.

What’s was surprising was a 3.9% reported decline in sales at Internet sellers. That would mark the sharpest drop since November 2008 — the middle of the last recession.

By all industry accounts, online merchants led by Amazon AMZN, +0.23% and eBay EBAY, +0.47% reaped big sales gains.

Less surprisingly, sales tumbled 3.3% at department stores that have been losing ground for years to mainly Internet based competitors. Traditional brick-and-mortar chains such as Macy’s M, -0.24% Kohl and Nordstrom posted disappointing sales in December.

Sales also fell at bars, restaurants, apparel stores, grocers, home furnishers, pharmacies and outlets that sell hobby items such as books and sporting goods.

Big picture: The sales slump in December is likely to weigh on the government’s official scorecard for the economy known as gross domestic product. Economists had estimated GDP would slow to 2.7% in the final three months of the year, but now that estimate could be taken down even further.

What does it mean for the economy in 2019? Hard to say. The stock market tanked in December and that may have hurt sales. At the same time, though, companies continued to hire at a strong clip in January. As long as the labor market remains healthy the economy should avoid a recession.

Question: Should the Fed have raised interest rates sooner to defuse the late 1990s stock bubble? What has the Fed learned about bubbles since then?

Who could have looked at the Nasdaq in 1999 and not had some concern that these prices had reached bubble levels? Shouldn't we have tightened monetary policy to address it? I think what most people would have thought inside the Fed then, and I wasn't but I agreed with it, was we have an economy that in terms of the goals Congress assigned us (jobs, price stability), it is doing just fine. It does not need a tighter monetary policy and if we tighten monetary policy to bring stock prices down, we are probably gonna have to tighten a lot. We are gonna harm our performance on all the things Congress put on our scorecard.

This has been a devastating financial crisis. It is hard to pick up the pieces. We have intervened very aggressively and stopped what could have been an utter financial meltdown. Most members of the Fed anticipate that we will have high unemployment for a number of years despite our best efforts. We have pushed close to the limits to what we can do to address that.

How about the Fed's longer-term predictions? The Fed started publishing the Board of Governors' and Reserve Banks' three-year forecasts in October 2007. At that time, the GDP growth forecasts among this group of 17 ranged from 2.2% to 2.7%. Actual 2010 GDP growth was 3%, outside the Fed's range.

The Fed forecasters told us that unemployment in 2010 would be in a range between 4.6% and 5%. In fact, it averaged about twice that, or 9.6%. The forecasters further predicted that both Personal Consumption Expenditures inflation (PCE, similar to CPI) and core PCE inflation would be in a range from 1.5% and 2%. The former came in at 1.3% and the latter at 1%, again outside the Fed's range. The Fed's scorecard on its 2007 three-year forecasts: 0 for 4.

In short, the Fed's premise that it can speak with authority about the future is flawed. During the two decades to 2006, its own experts were worse than outside ones in predicting one-year economic data. Since the start of the crisis in 2007, its three-year predictions have been worthless.

Most Federal Reserve officials are fond of observing that even as they pursue a very aggressive and unprecedented monetary-policy path, their actions aren’t stirring up inflation.

In doing so, they’re countering critics who worry the central bank has gone too far in efforts to stimulate growth, and that current policies are running a significant risk of generating a future surge in price pressures. Fed officials have countered they have the tools to make sure their actions don’t fuel a break out in prices. They also note the data doesn’t show much worry about future inflation gains.

But a new survey of local businesses conducted by the Federal Reserve Bank of Atlanta, released Wednesday, suggests South-Eastern region business leaders may not share the Fed’s confidence about future inflation.

The survey of 168 firms found an average expectation inflation would hang close to the Fed’s target at 1.9% over the next 12 months. That was up a touch from the average expected annual gain of 1.8% uncovered in a similar survey a month ago, but it was still below the Fed’s preferred level for price increases of 2%.

The short run was not where the potential problem lies. Survey respondents predict inflation over the next five to 10 years to rise by 2.9%, a level that would problematic to the Fed. Of those who answered the question, the bias of regional companies clearly points to expectations that long term inflation risks are rising. Respondents said there was a 38% chance prices will rise between 1.1% to 3%, and a 29% chance of a gain between 3.1% and 5%. Those surveyed put a one in five chance on inflation rising by 5% or higher over the next five to 10 years.

“What our panel of firms appears to be telling us is that the risks to the inflation outlook–in both the near term and longer term–aren’t particularly balanced,” Atlanta Fed economists Mike Bryan, Laurel Graefe and Nicholas Parker write. “In the near term, they weigh the inflation risks more heavily to the downside. But looking over the next 5 to 10 years, the panel sees the inflation risks leaning decidedly to the upside."