Minneapolis CNN —
It’s been a bumpy end to 2022 for spending in America.
US retail sales continued their decline in December, falling 1.1% as inflation remained high, the Commerce Department reported on Wednesday.
It’s the largest monthly decline since December 2021, and virtually every category (except building materials, groceries, and sporting goods) saw sales fall from the previous month.
Economists had expected sales to fall just 0.8% for the month, according to Refinitiv. November figure has been revised down to -1%.
All in all, the final 2022 retail sales report shows a muted end to a holiday season that has crept even further into October compared to the traditional times of late November and December.
October was the last month of strong retail sales in 2022 as discounts and slowing inflation prompted consumers to shop more, said Kayla Bruun, an economic analyst at Morning Consult.
“I think the hope was that this would add a little more momentum to the holiday season,” she said. “But really, it turned out to be more of an early bump that actually took away some of the spending that would otherwise have happened in November and December.”
The Commerce Department’s retail sales data are unadjusted for inflation, which hit a 40-year high in June before falling in the second half of 2022 and 6.5 for the 12-month period ending December, according to the latest CPI % reading published last week.
Wholesale price growth is also slowing significantly: December’s producer price index came in at 6.2%, according to Bureau of Labor Statistics data released on Wednesday.
During the holiday season in November and December, retail sales rose 5.3% from 2021 to $936.3 billion, the National Retail Federation reported on Wednesday.
The holiday total, which is not adjusted for inflation and excludes sales at car dealerships, gas stations and restaurants, falls short of the trade association’s forecasts of 6% to 8% Christmas sales growth.
“We knew that given the early October buying that likely pulled some sales forward, as well as pricing pressures and the cold, blustery weather, it could be spot on for the final holiday sales,” said Jack Kleinhenz, chief economist at NRF, in a statement. “The pace of spending has been erratic and consumers may have retreated more than we had hoped, but these numbers show they have been doing reasonably well in a challenging, inflation-driven environment. The bottom line is that despite what’s happening around them, consumers are still engaged and shopping.”
Consumer spending has remained resilient despite inflation, rising interest rates and fears of a recession. However, some economic data suggests that activity may be losing some steam and that Americans are running out of dry powder.
“I think consumers have become very active in managing their household budgets and spending propensity,” said Matt Kramer, national sector head for consumer and retail at KPMG. “They spend more time looking for deals and deciding when to make purchases.”
This is reflected in monthly sales declines in categories such as motor vehicles, down 1.2% from November; furniture by 2.5%; and electronics, down 1.1%, according to Wednesday’s report.
“With these big purchases, funded purchases where interest rates play a role, consumers are certainly postponing those decisions and lengthening their buying cycles around the larger categories,” he said.
The next few months are traditionally the slowest for retailers, but headwinds like credit card debt and stubborn inflation could make this worse, said Ted Rossman, senior industry analyst at Bankrate.
“A further slowdown in purchasing seems likely, at least in the short term,” Rossman said in a statement.
Discretionary spending tends to be the first to drop, with people typically cutting back on travel, dining out and other spending, said Amanda Belarmino, an assistant professor of hospitality at the University of Nevada in Las Vegas.
However, the post-pandemic pent-up demand that fueled high spending on services in 2022 still lingers. Spending on food services and drinking establishments rose 12.1% year-on-year in December.
“What we’ve seen in restaurants, tourism and hospitality is in complete contrast to what we typically see in an economic slowdown,” Belarmino said. “We’ve seen consumers continue to make this spending. But where you’re seeing these slowdowns is in things like people canceling their streaming services, canceling their peloton, canceling their home services. So it seems that consumers are making these trade-offs.”
However, shifts in tipping activity could herald shifts to come.
“The average tipping rate in the US has gone up to about 18% to 20%, and there are some indicators that are going back down to the 15% range,” Belarmino said. “It’s not a big deal, but it’s a way for consumers to save money.”
How spending activity in service industries is shaping up will be a critical indicator in the coming months, Morning Consult’s Bruun said, adding that a strong labor market should help prevent a dramatic collapse in spending.
“That was the component of consumer spending that drove growth,” she said. “And it’s going to have to be in the future because we’ve really seen the demand for goods being unlocked on a large scale.”