Oil complicates the US retail sales picture

Despite the disappointing retail sales numbers, a combination of factors should ensure the US household sector thrives in 2015.

Household spending took a tumble during December. But rather than reflecting insufficient demand, the weakness appears to be related to lower oil prices, which smashed gasoline sales during the month. The combination of lower oil prices, strong job growth and a higher US dollar should ensure that household spending bounces back in the coming months.

Retail sales fell by 0.9 per cent in December, well below market expectations, to be 3.2 per cent higher over the year. Growth in October was downwardly revised to 0.4 per cent (from 0.7 per cent last month).

Retail activity in the December quarter sits just 0.4 per cent above the September quarter average and points to a lacklustre contribution to end of year real GDP growth. However, the story is a little more complicated than that.

A large part of the fall relates to softer oil prices and therefore the damage may not be as great as first thought. Spending at gasoline stations fell by 6.5 per cent in December and subtracted 0.6 percentage points from growth in the month.

Excluding gasoline sales, retail trade fell by 0.4 per cent in the month of December. Nevertheless, sales were up 1.3 per cent in the December quarter, which points to more than reasonable growth when real GDP is released at the end of the month.

The final outcome will rely significantly on the price deflator applied to gasoline sales and indicates that there remains considerable uncertainty surrounding household consumption in the December quarter national accounts.

But clearly petrol sales were not the only source of weakness during December. Spending on electronics & appliances and building materials fell by 1.6 per cent and 1.9 per cent, respectively. Retail spending on clothing & accessories and at department stores was also down.

Partially offsetting these trends was greater spending on food; spending on food & beverages rose by 0.3 per cent, while spending at grocery stores climbed by 0.4 per cent. Momentum within these sectors has increased somewhat recently and points to stronger growth in the coming months.

Obviously this result will be dissected from a number of angles in the days ahead. However, it appears too soon to make any firm conclusions.

That the result was weak is undeniable but without having access to the inflation-adjusted data we should be cautious before drawing too many conclusions. A sharp fall in relative prices -- as has recently been the case with petrol -- can throw up some unusual results.

A decline in oil prices is traditionally treated as a bit like a tax cut. Since spending on petrol is a necessity -- that is the volume consumed is quite resistant to changes in price -- a lower petrol price effectively boosts the purchasing power of consumer incomes. With oil prices lower, households can buy more food and petrol but also more of other goods and services.

Obviously that hasn’t eventuated yet but there may be a mismatch between when households realise that petrol prices are lower and when they believe that they will stay low. In the upcoming months, I expect consumer spending to pick-up, particularly in discretionary spending, with both the lower oil price and the higher US dollar acting to boost demand.

The outlook for household spending remains quite bright -- although in the days to come many analysts will revise down their expectations. The main concern for the household sector remains wage growth, which continues to disappoint.

On a trend basis, the US labour market is rising at its fastest pace since November 1997 and has just enjoyed its strongest calendar year since 1999 (Why the Fed won’t rush to raise rates, January 12). The unemployment rate dropped to 5.6 per cent in December and even the participation rate appears to have stabilised somewhat over the past year.

All of these factors should underpin the household sector during 2015. Naturally there are risks -- largely related to asset prices and wage growth -- but the combination of lower petrol prices, strong job growth and a higher dollar should ensure that the household sector goes from strength-to-strength this year.

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