The Fed needs to pay attention: Amid high demand from our drunken sailors, retail sales surged in late 2024 and inflation got its second wind

More consumers, more workers, more jobs, more money. GDPNow is getting into these retail sales.

By Wolf Richter for WOLF STREET.

Retail sales increased by 0.45% in December compared to November (+5.5% annualized), and November and October were revised upwards – October from +0.46% to +0, 56% and November from +0.69% to +0.77% – and it’s at the top. Among these upwardly revised sales, December sales increased an additional 0.45%, all seasonally adjusted.

The slow first half was followed by a meteoric acceleration in the second half, particularly over the last four months.

Unadjusted for season, December sales reached a record $794 billion. E-commerce has been a big winner; sales jumped 10.2% year over year to $156 billion, for a 19.6% share of total retail sales, surpassing auto dealerships and making it the retailer category #1 for the month.

Acceleration in the second half: someone turned on the tap.

The three-month average – which includes previous revisions, smoothes out month-to-month squiggles and better shows the trend – rose a seasonally adjusted 0.59% in December, following average growth rates over three months of +0.74% in December. November, +0.45% in October, and +0.66% in September.

To have a point of reference, on an annualized basis, December’s three-month average growth rate of 0.59% equates to an annual rate of 7.3%. The 0.74% growth rate recorded in November equates to an annual rate of 9.3%. This represents enormous growth for the United States.

Someone turned on the tap in the second half and retail sales exploded after a slow first half. June was handicapped by the CDK hack of thousands of dealers’ cloud software which prevented them from processing sales in June, which were then processed in July, moving that portion of retail sales from June to July, but this is not the case. This does not explain the surge in retail sales over the last four months of 8.2% at an annualized rate:

• Total 6 months January-June: +0.1%, annual rate +0.2%.
• Total 6 months July-December: +3.8%, annual rate +7.7%.
• Total 4 months September-December: +2.67%, annual rate +8.2%.

Note the steepening of the slope over the last six months (black box):

GDPNow jumped to 3.0% due to these retail sales.

The Atlanta Fed’s GDPNow “nowcast” for fourth-quarter “real” GDP (inflation-adjusted) jumped today to a 3.0% growth rate, after including data on retail sales.

Over the past 15 years, the United States has averaged “real” GDP growth of about 2%. If GDPNow hits its target, fourth-quarter real GDP would be around 3.0%. Over the past five quarters, there has only been one weak point, Q1 2024 with inflation-adjusted growth of 1.6%. The other four quarters ranged between 3.0% and 4.4% inflation-adjusted growth, which is huge for the United States.

E-commerce and other “non-store retailers” (e-commerce retailers, e-commerce operations of physical retailers, stalls and markets): Total unadjusted sales jumped 10.2% year-over-year to $156 billion (blue). Huge seasonal adjustments reduced that figure to $127 billion (red). Three-month average sales in December compared to November, seasonally adjusted, jumped 0.62%:

More consumers, more workers, more jobs, more money.

Our drunken sailors, as we lovingly and facetiously call them, are in the mood to spend. The job market has been strong, with 2.23 million additional payroll jobs created in 2024 and with hourly wages up 4%, outpacing inflation for the second year. Consumers have huge amounts of money in money market funds and CDs. Stocks, real estate prices and cryptos have soared in recent years, and consumers who own them (64% are homeowners and many hold stocks in their retirement funds) feel good.

And there are many more consumers: net immigration added 2.8 million people to the population in the 12 months to July 2024, and 4.0 million in the previous two months, and so the U.S. population over those three years climbed 2.4%, including nearly 1% in the 12 months through July, the highest percentage growth rate since 2001, according to updates demographic from the Census Bureau in December.

Many of these newcomers are already working and also spending money (detailed discussion here):

Amid this strong demand, inflation is finding its second wind. The Fed needs to be careful.

Inflation has been accelerating in recent months. The last piece of the puzzle arrived yesterday: the consumer price index increased by 0.39% (+4.8% annualized) in December compared to November, the largest increase since February 2024. It ‘accelerates from the low point in June (blue).

The three-month CPI, which smooths out some of the monthly scribbles, jumped 3.9% annualized, the biggest increase since April and the fifth straight monthly acceleration.

This acceleration in the monthly CPI inflation rate over the past four months parallels the rise in retail sales.

The year-over-year CPI rose 2.9%, the largest increase since July and the third consecutive month of acceleration (detailed discussion here).

But our drunken sailors do not spend money everywhere in the same way.

Sales at non-store retailers (primarily e-commerce) and auto and parts dealers accounted for almost 40% of total retail sales in December.

Some of the other major categories also saw strong sales, but not all. Some of the unique pandemic booms, such as home improvement, are gone and won’t come back, it seems.

New and used vehicle dealers and parts stores, the second largest category in December: sales on a three-month average basis climbed almost 2% (seasonally adjusted) in December from November, and 7.5% year-over-year (unadjusted) to reach $141 billion. It’s a very good end to the year which started a little slowly.

The increase in new and used vehicle dollar sales in 2021 and 2022 has been caused by ridiculous used vehicle price increases and a combination of additional stickers, lack of incentives and higher MSRPs for new vehicles, in a context of shortage at the time. Starting in mid-2022, used vehicle prices began to plunge and new vehicle prices stabilized. Even though unit sales have increased, dollar sales have stabilized.

But in recent months, prices for new and used vehicles have started to rise again, contributing to the worst month-over-month CPI inflation reading since February and the worst reading ever. year-over-year inflation since July, as we discussed here yesterday. . These price reductions led to a stabilization of dollar sales during these 18 months, despite the increase in retail unit sales.

This recent increase in new and used vehicle prices and high sales volume has created this surge in dollar sales at new and used vehicle dealerships.

Food services and drinking places (Category #3, 13% of total retail sales), includes everything from cafeterias to restaurants and bars. After a decline in early 2024, moderate growth has resumed:

• Sales: $97 billion
• Compared to the previous month, 3-month average: +0.23%
• Over one year: +3.2%

Food and beverage stores (12% of total retail sales). CPI prices for at-home food products exploded from 2020 to early 2023, leading to a surge in sales, then stabilizing at high levels for a while, before starting to rise again:

• Compared to the previous month, 3-month average: +0.30%

General merchandise stores, minus department stores (9% of total retail), including retailers such as Walmart, which is also the largest grocer in the United States.

• Compared to the previous month, 3-month average: +0.21%

Gas stations (7% of total retail sales). Dollar sales at gas stations move almost in lockstep with the price of gasoline. Gasoline prices began to fall in mid-2022 and continued to fall until recently. These price cuts have lowered dollar sales at gas stations. Sales at gas stations also include all other merchandise sold by gas stations.

Gasoline prices have started to rise again recently, and so there’s this little hook for December, a three-month average that includes the price drop in October, a small increase in November, and the biggest increase in December:

• Compared to the previous month, 3-month average: +0.63%

Sales in billions of dollars at gas stations (red, left axis); and the CPI for gasoline (blue, right axis):

Building materials, garden supplies and equipment stores (6% of total retail sales). The huge renovation boom during the pandemic fizzled at the end of 2022 and sales fell for a while. In 2024, sales started to increase again from still very high levels, but at the end of 2024, they fizzled again:

• Compared to the previous month, 3-month average: -1.0%

Health and Personal Care Stores (5% of total retail sales:

• Sales: $38 billion
• Compared to the previous month, 3-month average: -0.42%
• Over one year: +2.3%

Clothing and accessories stores (3.7% of retail trade):

• Compared to the previous month, 3-month average: +0.60%

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