WASHINGTON D.C.: In December, US retail sales recorded its largest drop in one year, due to lower purchases of motor vehicles and various other goods, indicating that consumer spending and the overall economy will have weaker growth into 2023.
Other data released this week showed that the second consecutive monthly retail sale decline, mostly in goods, is undercutting factory production, with manufacturing output recording its largest drop in nearly two years in December, while monthly producer prices also fell.
These signs could encourage the Federal Reserve Bank to further slow the pace of its rate increases next month, which are now the fastest rate hikes seen since the 1980s, but as the labor market remains tight, it is unlikely to stop its monetary policy tightening.
"Consumers are likely retrenching during a time of economic uncertainty. The trajectory for the economy is weakening and recession risks are rising for 2023," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina, as quoted by Reuters.
In December, US retail sales plunged 1.1 percent, the highest drop since December 2021. Economists polled by Reuters forecasted sales to decrease by 0.8 percent.
The decline in sales last month could partly be due to the prices of good falling during that period.
Last week, the Fed's Beige Book report described consumer spending as increasing "slightly, with some retailers reporting more robust sales over the holidays. But retailers noted that high inflation continued to reduce consumers' purchasing power, particularly among low and moderate-income households."
In 2022, the Fed raised its policy rate by 425 basis points from near zero to a 4.25 percent - 4.50 percent range, the most since 2007, and in December it forecasted an additional 75 basis points of hikes in borrowing costs by the end of 2023.
Meanwhile, the third report from the Labor Department showing the producer price index for final demand decreased 0.5 percent in December, after rising 0.2 percent in November, indicating that inflation is continuing to ease.
Meanwhile, Jose Torres, senior economist at Interactive Brokers in Miami, said, "The Fed is making progress in fighting inflation, and while it is unclear if it will cause the Fed to become more dovish, it at least implies that the central bank may not need to become more aggressive in raising rates and tightening liquidity," as reported by Reuters.