A Happier Retail New Year

The market may be in for another shock this week when the government releases its preliminary estimate of retail sales for January. It’s likely that retail sales grew by more than expected as the year kicked-off.

Retail sales, which will be reported out of the Commerce Department on Wednesday, are expected to have risen in January by a strong 1.7 percent month-to-month, according to Econoday. The big jump in wholesale used car prices suggests a surge in auto sales will be a major factor pushing retail sales up. Higher gas prices likely pushed up sales at gas stations, but these may be offset by lower sales elsewhere. Excluding autos, sales are expected to climb by 0.7 percent. Excluding autos and gas, sales are seen as climbing 0.6 percent.

Yet there are several indications that the market may be underestimating household purchases for January. In the first place, forecasters have not quite come to terms with the shift in consumer behavior since the pandemic. Consumers are doing their holiday shopping earlier, which has led to a series of disappointing sales in November and December. The flip side of this is that the post-holiday consumer hangover decline in January is far milder than it used to be. This is one reason we saw upside surprises in retail sales in both January of 2022 and January of 2021.

Seasonally Maladjusted

There’s also the matter of seasonal adjustments. These are still largely based on pre-pandemic patterns. Before seasonal adjustment, retail sales in December were up to $749.4 million from $695 million in November. The seasonal adjustment assumed a bigger increase; so, after adjustments this gets reported as a 1.1 percent decline. Similarly, last year retail sales dropped from December 2021’s $712.7 million to $580.9 million. This decline showed up as a 3.8 percent increase after seasonal adjustment.

In the chart below, you can see that big downward spikes in unadjusted retail sales (blue line) in January showed up as upward spikes in the adjusted figures (red lines).

It’s also important to note that the retails sales figures are adjusted for seasonality but not inflation. Some of the seasonally adjusted decline in December was likely due to a decline in inflation, especially the price of goods. In January, inflation likely accelerated, as we explained last week. This is likely to be reflected in higher nominal retail sales figures (although the extent of discounting to clear unwanted inventories may offset this).

Sizzling Jobs, Exploding COLA

The shocking jump in payrolls for January means more spending power for households, adding another tailwind for retail sales. The payroll growth also likely reflects businesses seeing increased demand for goods and services, suggesting rising retail sales. The general rule is that businesses increase staffing when they are swamped with demand. And it was not just payrolls that rose — job openings increased to 11 million at the end of December.

The federal government’s budget deficit in December was $85 billion, nearly four times as large as it was a year prior. This was due to rising spending and a fall in revenue. While the budget deficit does not directly feed into retail sales, the deficit does inject additional buying power into the private sector that becomes available for consumer spending (albeit with a lag).

Social Security payments ballooned in January thanks to the cost of living adjustments (COLAs). These jumped 8.7 percent last month compared with the prior year. People living on fixed-incomes, who may have been unable to expand spending last year when prices rose, likely responded to the jump in income by spending more.

Is It a Head Fake?

There’s a danger the market may read too much into the numbers if the jump we expect materializes. A bigger-than-expected headline figure in retail sales or even in core retail sales—excluding autos and gas—should not be interpreted as necessarily indicating a similarly sized acceleration of the economy. Part of it will likely be due to the statistical illusion created by the combination of forecasts that aren’t adjusted to post-pandemic shopping patterns and seasonal adjustments that have become maladjusted.