Weak Retail Sales Add to Wall Street’s Woes

Weak December retail sales have added to the recent woes of Wall Street.

According to the U.S. Census Bureau, retail sales — a measure of how much consumers spend at stores, restaurants, and online — declined 1.9% last month. That’s below market forecasts, and a significant reversal from a 0.2% growth in November. Excluding autos, retail sales registered an even higher decline of 2.3%.

It’s the most significant decline since last February, adding to Wall Street worries associated with higher interest rates. Meanwhile, both numbers underestimate the actual drop in sales, as they aren’t adjusted for inflation, which has been running north of 6% in recent months.

The weak retail sales come a couple of days after the Fed’s Beige Book release, which warned that business conditions deteriorated in the last weeks of 2021.

What Drives the Decline

One of the reasons for the significant decline in December retail sales is the rush of consumers to shop early rather than later for the holiday season out of concerns that merchandise will run out of inventory. That’s reflected in an above-average decline in non-store sales (8.7%).

Another factor is rising inflation, making it hard for consumers to afford the same quantity of the things they usually buy, shedding discretionary items like furniture, sports goods, and automobiles.

The retail sales statistics count what consumers spend on goods and some services. Still, they don’t measure expenditures on services such as entertainment, recreation, and traveling, which have been affected negatively by the resurgence of the COVID-19 pandemic.

Fears of Stagflation

Weak retail sales usually help ease inflationary pressures. However, that doesn’t seem to be the case this time around. Instead, the supply-side bottlenecks fueling inflation continue to persist across the economy, and are made worse by labor shortages.

Economists know too well what this combination of weak sales and elevated inflation means: stagflation, an economic slowdown that coexists with rising inflation, similar to the situation back in the mid-1970s and the early 1980s.

Wall Street doesn’t like such a development for a couple of reasons. One is that stagflation complicates the job of the Fed, as it must deal with two problems at once: lower inflation while keeping economic growth alive.

Meanwhile, a weakening economy hits listed companies hard in what equity analysts pay most attention to, the top line. Rising inflation adds to the uncertainty over the direction of interest rates.

Wall Street doesn’t like either. Thus, the sell-off in all major market indexes following the release of the retail sales figures.

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