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Why December’s Retail Sales Decline Was the Worst in Nine Years

Retail sales for December weren’t quite what the industry expected.

The government’s retail sales report released Thursday showed the largest decline in nine years, with sales sliding 1.2 percent. While worrisome, the news may not yet be an indicator of a larger trend even despite a holiday shopping season that was worse than expected.

The report for January and even February may not be great either, thanks to the 35-day government shutdown that began in late December. The shutdown likely impacted consumer confidence, and is expected to have a hangover effect at least through part of February.

For the December report, top line sales fell 1.2 percent after rising 0.1 percent in November. Data from the Census Bureau indicates the 1.2 percent decline was the largest drop since September 2009. The control group, excluding sales for food, autos, gas and building supplies, fell even lower at 1.7 percent. Declines were led by sporting goods and hobby stores, down 4.9 percent; miscellaneous brick-and-mortar retailers, which fell 4.1 percent, and non-store retailers, such as online retailers, down 3.9 percent. Department stores fell 3.3 percent, while health and personal care stores slipped 2 percent. Sales at apparel and accessories stores were down 0.7 percent from November.

Economists from Moody’s Analytics had projected a retail sales decline for December of 0.1 percent.

USB economist Samuel D. Coffin said, “We have been expecting a slump in activity in [the fourth quarter] because of tariffs. The fall in consumption is worrisome and reflects greater weakness in the household sector in [the fourth quarter] than we had been expecting.”

He also noted some caution in how the retail sales report should be interpreted: “We take some signal from the steepness of the decline, but also believe that pull-forward of consumption into November as well as potential problems with data collection as a result of the government shutdown are also weighing.”

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Walter Loeb, retail consultant and former retail analyst, said, “The shopping season wasn’t great. We had a very strong Thanksgiving and Cyber Monday, but after that sales dissipated until the last few days when retailers started marking down the store.”

Loeb expects the report for January to follow suit, with February possibly showing a partial improvement, although that could get offset by the impact from the recent ice storm.

“Basically you average it out for the year anyway, or you can assume the consumer is in hiding again if the decline continues. The forecast for 2019 wasn’t good anyway because people weren’t looking for a strong first half,” Loeb said. He also cautioned that if the projected tariffs go into effect on March 1 on $200 billion of Chinese imports because the U.S. and China can’t resolve their dispute, then that would not be good news for either the consumer or future government retail sales reports.

For Mickey Chadha, credit retail analyst for credit ratings firm Moody’s Investors Service, attributed the poor performance to other factors.

“We believe the disappointing results were most likely triggered by the sharp equity market losses, interest rate uncertainties and the looking government shutdown, which spooked consumers. While January sales may also be soft due to the government shutdown, we view the December slowdown as an outlier, not a trend,” Chadha said.

He still expects U.S. retail sales to grow in the range of 4.5 percent to 5.5 percent for 2019, mostly due to relatively low unemployment along with modest wage growth. Chadha did single out the department store channel as being among the hardest hit in the retail industry, explaining that “given their relatively slow supply-chain system, [they] can quickly suffer inventory backlogs when consumer demand suddenly shifts.” Other factors include competition from the off-price and online channel, weak mall traffic, and “tepid apparel demand,” he noted.

A report from Moody’s Analytics said the weakness was surprising against a backdrop of falling gasoline prices, strong labor markets and tax cuts at the start of 2018. And while Moody’s thought cold weather in parts of the country might have contributed to the weakness, it also said the government shutdown in January would weigh against a rebound.

Moody’s said the labor market will be key for consumer spending later in the year. While the outlook is “bright,” there could be some risks–a delay in backpay for federal workers and government contractors, which could undermine spending early in the year; lower tax refunds, which could hurt sales growth over the next few months, and trade tensions because if tariffs rise globally, that could slow job and income growth.