Retail sales fell 1.9 percent in December, the Commerce Department reported on Friday, reflecting a slowdown during an otherwise robust holiday shopping season that started earlier in the year for many consumers.
It was the first drop after four straight months of sales gains, although November’s increase from October slowed due to the extended holiday shopping season, prompted by fears of product shortages and price hikes. According to the report, total sales from October to December rose 17.1 percent from the same period last year. Sales in December increased by 16.9 percent compared to 2020.
Beth Ann Bovino, chief US economist at S&P Global, said that while there would inevitably be “headline shock” over a weaker number, the overall picture for retail sales has been strong in recent months.
“This is not a sign of consumer weakness,” said Ms. Bovino, who had forecast a decline. “Given that households have relatively strong balance sheets with high savings and a strong labor market with rising wages, consumers don’t necessarily appear to be closing their wallets. They’re taking a short break.”
The retail sales report provides a data point on how consumers are thinking after a report this week showed that inflation rose to a 40-year high at the end of 2021. Prices have risen as new variants of the coronavirus have exacerbated supply chain problems and robust consumer demand for goods. At the same time, the Omicron wave has caused widespread staff shortages and may have helped distract some consumers from business and holiday gatherings.
Ms Bovino said she doesn’t think inflation is playing a role in the overall sales decline, but that concerns about higher prices are likely to emerge in the first quarter of this year.
Understand the supply chain crisis
Morgan Stanley economists had forecast retail sales to rise 0.4 percent in December. Though inflation topped coronavirus as the top concern of consumers surveyed in November, “it hasn’t impacted spending plans,” they said in a note last week.
Instead, holiday sales appeared to be breaking records, and lower-income consumers appeared to be operating with relatively better spending power, the economists wrote. At the same time, they expected the Omicron wave to result in more spending on goods than on services.
The pandemic has further shaped consumer habits in the United States.
Fewer people were shopping in stores this holiday season, although the Omicron variant only became a prominent threat in December. According to Sensormatic Solutions, retail foot traffic in the United States decreased by 19.5 percent between November 21 and January 1 compared to 2019. That was a slight improvement from the lows of the pandemic in 2020, when foot traffic fell 33.1 percent over the same period compared to 2019, but still a significant change.
As retailers grapple with inflation and supply chain issues, this has given the largest US retailers an added advantage. They had already benefited during the pandemic from being able to stay open while others were closed, from the variety of goods they transport and from initiatives like curbside delivery.
“We’re talking about Walmarts and Targets and Costcos, the big players,” said Mickey Chadha, retail analyst at Moody’s Investors Service. “They have chartered their own ships and are bringing in products. You have a lot more power with providers to get priority. And they actually planned ahead too.”
At the same time, Mr. Chadha said, they haven’t had to raise their prices as much as smaller retailers and are likely to benefit when lower-income consumers seek value to supplement their dollars.
“They’re gaining market share because they’re able to drive prices down and absorb that margin hit much better than some of the smaller, weaker retailers,” he said.
Costco, for example, said on a December conference call that it believes it is successfully handling the effects of inflation through its relative purchasing power and supplier relationships. That often meant Costco and its suppliers each took fewer markups, Richard Galanti, the company’s chief financial officer, said on the conference call.
“We’ve always said we want to be the last to raise the price and the first to lower the price, as we know there are limits to what you can do as a result of these cost increases,” Mr Galanti said.
How the supply chain crisis unfolded
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The pandemic triggered the problem. The highly complex and interconnected global supply chain is in a state of upheaval. Much of the crisis can be traced back to the outbreak of Covid-19, which triggered an economic slowdown, mass layoffs and a halt to production. Here’s what happened next:
A reduction in shipping costs. With fewer goods being manufactured and fewer people holding paychecks at the start of the pandemic, manufacturers and shipping companies assumed demand would fall sharply. This proved to be a mistake, however, as demand for some items would increase sharply.
The demand for protective equipment rose sharply. In early 2020, the entire planet suddenly needed surgical masks and gowns. Most of these goods were made in China. As Chinese factories ramped up production, cargo ships began shipping equipment around the world.
Then a shortage of shipping containers. Shipping containers piled up in many parts of the world after being emptied. The result was a shortage of containers in the one country that needed them most: China, where factories began pumping out goods in record quantities
Demand for durable goods increased. The pandemic shifted Americans’ spending from dining out and attending events to office furniture, electronics and kitchen appliances — mostly purchased online. Spending was also encouraged by government stimulus programs.
Strained supply chains. Factory goods quickly flooded US ports. The surging orders outstripped shipping container availability, and the cost of shipping a container from Shanghai to Los Angeles increased tenfold.
Costco also acknowledged that while it was grappling with inevitable supply chain issues, including late arrivals of containers on the West Coast, it “felt pretty good to stay stocked.”
Many other retailers have said supply chain problems have hurt their revenue over the past year, as pandemic-related factory closures in Vietnam and shipping delays have kept goods off American shelves and warehouses.
“The holiday was weaker than expected as units scheduled to arrive in December did not transit ports in the timeframe we anticipated,” Abercrombie & Fitch chief executive Fran Horowitz told a conference on Tuesday. “This was beyond our control and resulted in lost sales during peak sales periods. Aside from these delayed units, we also saw renewed Covid-related restrictions around the world.”
Still, some retail executives have said they’d rather have a supply problem than a demand problem, especially given the sharp ebb and flow in consumer preferences over the past 18 months. And it’s not yet clear whether price increases will dampen demand given quarterly performance.
Mr Chadha said retail sales were strong overall in 2021, although he expected the picture to change in 2022 as supply chain issues and higher prices became bigger factors.
S&P’s Ms. Bovino said she expects more selective buying to prevail later this year as savings accounts begin to dry up and consumers “remember what prices used to be like.”
Retail sales in January may also be impacted by reduced store hours and closures as the Omicron wave causes widespread staff shortages in several industries.