- Falling December retail sales indicate a weakening in consumer spending except for travel.
- Soaring mortgage rates reduced demand for single-family homes, while massive growth in multifamily construction could lead to a glut.
- The employment picture stays strong as jobless claims remain historically low.
Retail sales declined more than expected in December, and adjusted for inflation, retail sales were down from a year ago. However, retail sales do not include spending on most services including travel, which appears to have remained strong in the latest credit card spending data for December.
Residential construction fell in December, and with permits declining, new construction will decrease further in the months ahead.
Existing home sales dropped in December for the eleventh straight month.
Initial jobless claims slipped in the latest week, but the broadest measure of continuing jobless claims is up 365,000 over the last four weeks.
Retail Sales Fall More Than Expected Month Over Month
Retail sales declined in December more than expected. The initial estimate for December showed spending down 1.1% when a drop of 0.9% month over month was expected. In addition, November sales were revised down from an initial decline of 0.6% to a decline of 1.0%.
The auto sector performed slightly worse than the overall market as sales excluding motor vehicles and parts declined by 1.1%, while sales of motor vehicles and parts slipped by 1.2%. As gas prices dropped again in December, spending at gas stations fell 4.6%.
Few categories saw gains in December. Gas stations, furniture, home furnishing, electronics, and appliance stores (-2.0%), motor vehicle and parts dealers, non-store (e-commerce) retailers (-1.1%), and miscellaneous store retailers (-1.1%) saw the largest declines. Of the major categories, only building material stores (+0.3%) and sporting goods, hobby, book, and music stores (+0.1%) saw gains.
The December results meant retail sales were up 6.0% year over year on a nominal basis, the same as in November. Compared with last year, only furniture, home furnishings, electronics, and appliances (-2.0%) were down. Adjusted for inflation using the Consumer Price Index, retail sales declined 1.1% for the month and were down 0.4% from a year ago.
The retail data reflect a clear weakening trend in consumer spending. However, retail sales do not include spending on most services, including travel, which appears to have remained strong in the latest credit card spending data for December.
Construction Softens in December
Residential construction declined in December. The seasonally adjusted annualized rate of housing starts fell by 1.4%, but the decrease was less than expected. Permits dropped 1.6% when a smaller decline had been expected. The starts decrease was only in multifamily, with a 19% decline as single-family starts grew 11.3%.
After the December decline in total, starts were down 21.8% from a year ago and down 10.1% compared to December 2019. The permits decline was all in single family, with a 6.5% decline compared to a 5.3% increase in multifamily. Permits were down 29.9% from a year ago and down 7.6% compared to 2019.
Permits lead starts, so the permitting pace at 1.330 million units was lower than the 1.382 million starts pace, which indicates that starts will decline in coming months. Compared to 2019, single-family permits were down 20.7% in December, while multifamily permits were up 15.8%.
The massive move up in mortgage rates in 2022 has clearly reduced demand for single-family homes, while the enormous growth in multifamily construction is likely leading to a glut of new apartments just when slowing economic growth starts reducing demand.
Home Sales Drop in December but Inventory Remains Limited
Existing home sales declined less than expected in December but extended the decline streak to eleven straight months. The existing home sales SAAR declined to 4.02 million from 4.08 million in November. At the December rate, existing home sales were down 34% from a year ago and were at the slowest pace since November 2010.
Inventory declined to 970,000 units, up 10.2% from a year ago. The National Association of Realtors reported that inventory remains limited. Inventory is still moving relatively quickly, as 57% of the homes sold in December were on the market for less than a month, and the typical time on the market was 26 days, up from 24 days in November and up from 19 days in December last year. The months’ supply of homes for sale fell to 2.9 months. The median sales price declined to $366,900, up just 2.3% from a year ago.
Jobless Claims Dip to Lowest Level Since September
Seasonally adjusted initial jobless claims declined by 15,000 to 190,000 for the week ending January 14, which was the lowest weekly level since September.
Non-seasonally adjusted initial claims declined by 54,000. The holidays create noise in initial claims. The unadjusted numbers remain higher than at the beginning of 2020 before the pandemic began.
Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation, increased by 17,000 from the previous week, bringing the total to 1.65 million as of January 7. That level of continuing claims was 116,000 lower than before the pandemic.
The broadest measure of continuing claims increased by 159,000 to 1.89 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is up 365,000 over the last four weeks but is 209,000 lower than the pre-pandemic level.
The labor market is not as strong as it was a year ago, but there is little evidence of major deterioration in the jobless claims data. Moreover, jobless claims remain at historically low levels relative to the job base.
A replay of the 2023 Cox Automotive Industry Insights and Forecast Call held on Thursday, Jan. 12, is available. Listen now.
Jonathan Smoke is the chief economist at Cox Automotive.