Retail Sales plunged in December, don't panic

Summary

A broad-based decline across various store types resulted in a sharp 1.9% drop in retail sales for December. We see today's cratering in retail sales more as a reflection of early shopping and pulled-forward demand than an Omicron impact or a seminal change in consumer activity. Inflation will be a bigger headwind for consumers than COVID in 2022.

Stumbling across the finish

Line Retail sales dropped 1.9% in December, the largest monthly decline since February; stripping away spending on autos and gas only makes it worse with a 2.5% decline. Those looking for confirmation of an Omicron-related slowdown will seize upon today's drop in retail sales as evidence, but this is a decline we have been anticipating since our first holiday sales forecast in September. We warned then about a year-end air-pocket and compared the struggle for retailers to holding an early lead in a football game. It is clear that most shoppers heeded the advice to get holiday shopping done early and that, combined with a massive surge in goods spending earlier in the year, conspired to pull sales sharply lower to end the year. The December drop is reminiscent of a similar decline in 2018 when retail sales fell 2.0% in that month. What followed was a sharp rebound in the first quarter of the following year. In fact the two largest monthly increases of 2019 occurred in January and March of that year. We are indeed concerned about the recent spike in COVID cases, and have noted how consumers have pulled back on restaurant dining, travel and other high-contact services. That said, we do not view today’s drop in retails sales as a sign that consumer spending is coming unglued. This is the very soft patch that we had warned about.

Holiday stress

Even with the plunge in sales in December, holiday sales still posted a record annual increase. Sales in November and December came in 12.9% ahead of last year's level and ahead of our forecast which called for an 11% gain in sales. But there are a few caveats that are worth emphasizing. First, this gain in holiday spending says more about sales between the holidays than it does about sales in the final months of the year. Record household stimulus helped lift spending in holiday categories, which boosted the level well-ahead of last year's estimates way before the holiday sales season was even underway. Further, holiday sales declined in both November and December, suggesting more sales were pulled forward to October this year as consumers got ahead of the well-advertised supply chain crisis and purchased most gifts early. Any purchases of gift cards will show up when they are redeemed rather than purchased, which could also be weighing on sales to an extent in December (and could boostJanuary's numbers). The nearly 9% decline in nonstore retailers (i.e. e-commerce) – the largest drop of any category – likely at least partly reflects consumers' desire for in-person shopping around the holidays.

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