Retail sales for December showed consumers continued to spend at a robust pace supported by solid growth in labor income amid a strong holiday shopping season.

However, a broadbased increase in retail spending may also reflect some stockpiling behavior ahead of potential trade wars, as consumers may foresee price increases if the proposed policies by the new administration are implemented. We expect consumer spending growth will decelerate later this year, albeit to a still solid pace.

Real retail sales of goods and food and beverage services rose by 4.1 percent annualized in Q4, on par with the robust reading in Q3, boding very well for overall real consumer spending and real GDP growth in the quarter. We estimate annualized real GDP grew at a solid 2.5% in Q4 2024.

Figure 1. Real Retail Sales suggest strong Q3 real consumer spending

Sources: Census Bureau and The Conference Board.

Trusted Insights for What’s Ahead^®

• We estimate strong consumption growth will continue into the beginning of the year, as consumer after tax, inflation adjusted income growth slightly accelerated over the course of H2 2024.
• Consumers, attracted by falling prices, continue to spend on big-ticket items despite restrictive policy rates.
• While services consumption will likely remain solid, we estimate it will be less robust in real terms as the year progresses as a larger portion of income will be diverted towards more expensive imported goods and necessity services, such as property and auto insurance.
• Continued health in the labor market, strong tracking for Q4 real GDP growth, and sticky core inflation suggest the Fed may delay the next rate cut until July. We anticipate 25bp of cuts each in July, September and December, which would lower the federal funds rate target range to 3.50-3.75 percent by yearend.

Report Highlights

Nominal retail sales came in slightly lower than expected, rising 0.4 percent month-over-month in December. The consensus was for a 0.6 percent increase. However, upward revisions to both October and November pushed the 3-month annualized rate to 7.3 percent up from 5.6 percent, previously estimated based on two months of data for Q4.

Control group sales, which exclude cars, gas, food services, and building materials and directly enter the calculation of GDP growth, grew at 5.4 percent annualized in Q4, only a touch lower than 5.9 percent in Q3.

Real retail sales, computed by deflating nominal sales by the consumer price index (CPI), rose by 0.1 percent in the month, but jumped by 4.1 percent annualized in Q4, on par with robust Q3 sales.

Consumers splurged on furniture, clothing and sporting goods and increased spending on electronics and motor vehicles. Higher gasoline prices boosted gas station sales.

In a slightly negative spin, restaurant sales – an incomplete but an early indicator of broader service spending dynamics – declined. This potentially suggests consumers are becoming a bit more frugal with respect to discretionary purchases, as inflation remains elevated.