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.
This Week's State Of The Economy - What Is Ahead? - 24 March 2023
Wells Fargo Economics & Financial Report / Mar 29, 2023
The FOMC hiked the federal funds rate by 25 bps on Wednesday amid continued strength in the labor market and elevated inflation.
This Week's State Of The Economy - What Is Ahead? - 01 July 2022
Wells Fargo Economics & Financial Report / Jul 14, 2022
As with the Mets and Yankees when they ran into the Astros over the last couple days, consumers staying power is showing signs of running out as inflation persists and confidence moves sharply lower.
This Week's State Of The Economy - What Is Ahead? - 29 July 2022
Wells Fargo Economics & Financial Report / Jul 31, 2022
Unlike the local temperatures, data released this week showed U.S. economic growth modestly declined in Q2.
This Week's State Of The Economy - What Is Ahead? - 13 October 2023
Wells Fargo Economics & Financial Report / Oct 13, 2023
The Consumer Price Index (CPI) rose 0.4% in September, a monthly change that was a bit softer than the 0.6% increase registered in August. The core CPI rose 0.3% during the month, a pace unchanged from the month prior.
This Week's State Of The Economy - What Is Ahead? - 22 November 2019
Wells Fargo Economics & Financial Report / Nov 23, 2019
Minutes from the October FOMC meeting indicated the Fed is content to remain on the sidelines for the rest of this year as the looser financial conditions resulting from rate cuts at three consecutive meetings feed through to the economy.
This Week's State Of The Economy - What Is Ahead? - 21 October 2020
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.
This Week's State Of The Economy - What Is Ahead? - 17 March 2023
Wells Fargo Economics & Financial Report / Mar 21, 2023
Retail sales declined 0.4% during February, while industrial production was flat (0.0%). Housing starts and permits jumped 9.8% and 13.8%, respectively.
This Week's State Of The Economy - What Is Ahead? - 09 April 2021
Wells Fargo Economics & Financial Report / Apr 10, 2021
This week\'s economic data kicked of with a bang. The ISM Services Index jumped more than eight points to 63.7, signaling the fastest pace of expansion in the index\'s 24-year history.
This Week's State Of The Economy - What Is Ahead? - 29 March 2024
Wells Fargo Economics & Financial Report / Apr 03, 2024
Consumer momentum remains largely intact, inflation continues to inch back down, albeit at a slower pace, and rate-sensitive sectors stayed in a holding pattern.
This Week's State Of The Economy - What Is Ahead? - 04 June 2021
Wells Fargo Economics & Financial Report / Jun 08, 2021
The CDC\'s relaxation of its mask mandate occurred mid-May, and as data for that month begins rolling in this week, it is evident there is no lack of demand. Supplies, on the other hand, are a worsening problem.
