The seemingly indefatigable U.S. consumer is finally starting to tire out. Retail sales fell 1.1% in December. Not only was the drop sharper than expected, but it came on top of downward revisions to November sales. Some pullback in retail spending seemed inevitable after sales had surged more than 30% above early 2020 levels and the pandemic-induced shift to goods in lieu of services unwound. Yet, the details of the report suggest the decline is more troubling than retail merely hitting an air pocket after demand for many items was pulled forward. Instead, the report hinted that consumers are retrenching more broadly. Grocery store sales were flat over the month despite higher food prices, while receipts at restaurants and bars were down 1.3% in real terms by our estimates in a sign consumers are cutting back on discretionary services in addition to goods. Control group sales, which feed into the BEA's calculation of GDP, declined 0.7% in December, the steepest drop in more than a year. Along with downward revisions to the two prior months, we have downwardly revised our estimate for Q4 consumer spending to an annualized rate of 2.7% from 3.4%.
Fading demand for goods has also started to take an undeniable toll on manufacturing. Manufacturing output plummeted 1.3% in December, and similar to retail sales, previous estimates of production were revised lower. Output of consumer durables and non-energy durables fell over the month, but the pain of higher interest rates and concerns about recession are spreading, with business equipment declining 2.0%. A survey of the manufacturing sector released this week pointed to further deterioration ahead. The Empire Manufacturing and Philly Fed indices both remained in contractionary territory in January, with new orders again falling according to each survey.
While retail and manufacturing have only recently started to falter in the face of higher interest rates and increasingly stretched consumers, the housing market has been overwhelmed by these headwinds for a year now. Data this week showed that the sharpest leg of the sector's adjustment may be behind us, but residential real estate remains under severe pressure. Building permits continued to slide in December, led by a 6.5% drop for single-family units. Meanwhile, a rise in permits in the lumpier multifamily segment only partially reversed the prior months' declines. Multifamily permits are now down 27% over the past year, only marginally less depressed than the 39% decline in single-family permits. Sales of existing homes also continued to decline in December and ended the year at their slowest pace since 2010.
That said, a pullback in mortgage rates as the end of the Fed's tightening cycle comes into view is helping to breathe at least a little more life into housing demand. Purchase applications jumped 25% the week end Jan. 13, and mortgage rates have continued to slide with the 30-year fixed rate dipping to 6.15%, the lowest reading since September. Lower financing costs alongside some relief in material prices the past couple of months helped builder sentiment tick up for the first time in 13 months in January. A sustained improvement, however, is likely some ways off, as weaker household finances and still-elevated mortgage rates keep the environment for builders challenging.
Wells Fargo Economics & Financial Report / May 18, 2021
The gain in output leaves the level of real GDP just a stone\'s throw below its pre-COVID Q4-2019 level (see chart).
Wells Fargo Economics & Financial Report / Oct 27, 2020
Real GDP jumped a record 33.1% during Q3, beating expectations. A 40.7% surge in consumer spending drove the gain.
Wells Fargo Economics & Financial Report / Jan 24, 2022
The Texans have earned a top draft position yet again, the Cowboys are home again for the remainder of the playoffs, and inflation concerns that continue to mount, along with ongoing supply chain disruptions, are weighing on homebuilder confidence.
Wells Fargo Economics & Financial Report / Oct 19, 2019
Personal consumption is still on track for a solid Q3, but retail sales declined in September for the first time in seven months.
Wells Fargo Economics & Financial Report / Aug 11, 2021
Despite a few misses on the headline numbers, economic data this week highlighted a theme of demand continuing to outstrip supply and ongoing slack in the labor market.
Wells Fargo Economics & Financial Report / Feb 29, 2020
The COVID-19 coronavirus hammered financial markets this week and rapidly raised the perceived likelihood and magnitude of additional Fed accommodation.
Wells Fargo Economics & Financial Report / Jul 13, 2020
The ISM non-manufacturing index jumped 11.7 points to 57.1, reflecting the broadening re-opening of the economy.
Wells Fargo Economics & Financial Report / Mar 21, 2020
Daily life came to a screeching halt this week as governments, businesses and consumers took drastic steps to halt the COVID-19 pandemic.
Wells Fargo Economics & Financial Report / Nov 07, 2022
Employers continued to add jobs at a steady clip in October, demonstrating the labor market remains tight and the FOMC will continue to tighten policy.
Wells Fargo Economics & Financial Report / Oct 21, 2020
Mobility is continuing to trickle lower in several major developed market economies. The U.K., France, Italy and Canada have all seen some further modest declines in retail/recreation visits.