Retail sales rebound strongly in January

Bottom line

Retail sales soared in January, posting their largest monthly gain since March 2021 and reversing sizable declines in both November and December. Combined with persistent inflationary pressures and a strong labor market, the Federal Reserve is likely to continue hiking interest rates deep into the second quarter.

Big January surprise Last month’s nominal retail sales surged 3%, well above consensus expectations for a 2% month-over-month (m/m) increase and declines of 1.1% in each of November and December. October rose by 1.1%, which set an initially positive tone for Christmas spending.

A year ago, consumers were battling a deadly spike in the omicron variant and brutal winter weather. But this January, the weather was very mild, and President Biden recently declared that the fading Covid-19 pandemic will end on May 11, so shoppers have had a much easier time of it.

Control results, which strip out food, autos, gas and building materials (and which feed directly into quarterly GDP calculations), soared by a much stronger-than-expected 1.7% m/m gain in January (expected gain of 1%). That compares with declines of 0.7% in December and 0.5% in November, although October rose by 0.4%.

Christmas spending somewhat soft Despite January’s powerful rebound, Christmas 2022 spending overall was relatively soft, rising by 6.6% year-over-year (y/y) from October 2022 through January 2023. That’s less than 40% of the strong 16.8% y/y gain in spending we saw during the October-through-January Christmas 2021 period, although better than the 5.7% y/y increase in Christmas 2020. That’s also still well above the average 4.2% y/y growth in holiday sales over the past decade (within a range of 2.2% to 6.6%).   

Why is Christmas a four-month retail holiday? Because of Covid, many retailers begin to aggressively promote their Black Friday holiday deals in October (like Amazon’s Prime Early Access sale on Oct. 11-12), which pull Christmas sales forward. November and December are prime holiday shopping months, and January accounts for about two-thirds of post-holiday gift-card redemptions, which only count as a retail sale when they’re redeemed, not when they’re purchased.  

Strong gift-card sales buoy Christmas Gift-card sales enjoyed double-digit increases to a new record in 2022, although half of U.S. adults neglect to redeem their gift cards. But nearly 90% of gift-card recipients spend 20% more than their gift card’s value when they redeem. 

Sector details solid Not surprising, then, that online sales rose by a solid 1.3% m/m in January, reversing declines of 1% and 0.9% in December and November, respectively.  Department store sales surged by 17.5% m/m in January, as many were aggressively cutting prices in a highly promotional Christmas to move mountains of unwanted inventory ahead of the spring selling season. With mortgage rates more than doubling over the past year from 3% to a peak of 7.35%, many homeowners have opted to stay put and freshen up their existing abodes instead, so furniture sales rose 4.4% m/m.  Electronics rose by 3.5%, clothing sales increased by 2.5%, and bars and restaurants surged by 7.2%, as revenge travel continues in earnest.

Social Security fuels spending Social Security checks increased by 8.7% at the start of the new year, representing the largest annual inflation adjustment in decades, which could have sparked stronger spending among the program’s 70 million recipients.

Fed to remain hawkish The combination of January’s stronger-than-expected retail sales, the lowest unemployment rate (3.4%) in 53 years and persistently sticky retail (CPI) and wholesale (PPI) inflation sent Fed watchers into a tizzy this week. We’ve been expecting another pair of quarter-point hikes on March 22 and May 3. But some investors are now tacking on an additional quarter-point hike on June 14, while others are upsizing the next hike back up to a half point. We continue to believe that once it hits its terminal fed funds rate at perhaps 5.25% this spring, the Fed is likely to remain there until 2024, when the economy decelerates into recession.

Financial market frenzy Over the past fortnight, benchmark 10-year Treasury yields have surged from 3.4% to 3.9% today, while the S&P 500 has declined by nearly 4% from overbought levels, a trend we expect to continue. 

Frugal February? Despite the surge in retail activity in January, we’re expecting consumers to pull in their horns this month. The consumer is stressed, in our view, particularly at the lower ends of the wage-and-skill spectrum. 

The personal savings rate has plunged from 26.3% in March 2021 to a 17-year low at 2.4% last September, before rising to 3.4% in December 2022. Concerned about the growing risk of recession and surging layoff announcements, consumers opted to shut their purses and raise some dry powder during the fourth quarter, which was consistent with declining retail sales in November and December.   

Credit card usage surged by nearly 17% in January 2023, while delinquencies rose by 2.1% in last year’s third quarter. Excess savings have declined by more than half over the past year, from $2.3 trillion in the third quarter of 2021 to an estimated $1 trillion at year-end 2022, with virtually all those savings held by the top half of the income spectrum.