Retail Sales Fell in December, a Slowdown in a Robust Holiday Shopping Season

Despite a decline of 1.9 percent in the final month of the year, sales for the fourth quarter of 2021 jumped 17.1 percent as consumers began their holiday shopping earlier.

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 increases, though the gain in November slowed from October because of the lengthened holiday shopping season brought on by fears of product shortages and price increases. Total sales for October through December were up 17.1 percent from the same period a year earlier, according to the report.

Beth Ann Bovino, chief U.S. economist at S&P Global, said that although there was bound to be “headline shock” over a weaker number, the broader picture for retail sales has been strong over the past few months.

“This is not a sign of consumer weakness,” she said. “Given that households have relatively strong balance sheets with high savings levels and a strong job market with wages climbing higher, it seems that consumers are not necessarily closing their pocketbooks. They’re taking a brief pause.”

The retail sales report provides a data point on the mind-set of consumers after a report this week showed that inflation climbed to its highest level in 40 years at the end of 2021. Prices have increased as new variants of the coronavirus have exacerbated supply chain issues and robust consumer demand for goods. At the same time, the Omicron wave has caused widespread staffing shortages and may have played a role in diverting some consumers from stores and holiday gatherings.

Understand the Supply Chain Crisis

The Origins of the Crisis: The pandemic created worldwide economic turmoil. We broke down how it happened.Explaining the Shortages: Why is this happening? When will it end? Here are some answers to your questions.Gifts Arrive on Time: Fears that a disrupted supply chain could wreak havoc on the holidays turned out to be wrong. Here’s why.Car Shortages: The limited supply of vehicles is forcing some to go to great lengths to find them, including traveling hundreds of miles.A Key Factor in Inflation: In the U.S., inflation is hitting its highest level in decades. Supply chain issues play a big role.

Economists at Morgan Stanley had forecast retail sales to rise by 0.4 percent in December. Even though inflation topped the coronavirus as the No. 1 concern for consumers it surveyed in November, that “came with no dent to spending plans,” they said in a note last week.

Instead, the holiday shopping season appeared to break records and lower-income consumers seemed to be operating with relatively better buying power, the economists wrote. At the same time, they anticipated that the Omicron wave drove more spending to goods rather than services.

The pandemic has continued to shape consumer habits in the United States.

Fewer people shopped in stores this holiday season, even though the Omicron variant did not become a prominent threat until December. Retail foot traffic in the United States was down 19.5 percent between Nov. 21 and Jan. 1 compared with 2019, according to Sensormatic Solutions. That was a slight improvement from the depths of the pandemic in 2020, when foot traffic was down 33.1 percent in the same period compared with 2019, but still a significant change.

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Fewer people shopped in stores this holiday season, with more consumers relying on e-commerce.Credit…Justin Sullivan/Getty Images

As retailers grapple with inflation and supply chain issues, it has given an additional advantage to the biggest U.S. retailers. They had already benefited during the pandemic by being able to remain open while others closed, from the variety of goods that they carry and through initiatives like curbside delivery.

“We’re talking about the Walmarts and Targets and Costcos, the big players,” said Mickey Chadha, a retail analyst at Moody’s Investors Service. “They’ve leased their own ships and they’re bringing in product. They have a lot more power with vendors to get priority. And they actually planned ahead as well.”

How the Supply Chain Crisis Unfolded

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The pandemic sparked the problem. The highly intricate and interconnected global supply chain is in upheaval. Much of the crisis can be traced 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. With fewer goods being made and fewer people with paychecks to spend at the start of the pandemic, manufacturers and shipping companies assumed that demand would drop sharply. But that proved to be a mistake, as demand for some items would surge.

Demand for protective gear spiked. 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 vessels began delivering gear around the globe.

Then, a shipping container shortage. Shipping containers piled up in many parts of the world after they were emptied. The result was a shortage of containers in the one country that needed them the most: China, where factories would begin pumping out goods in record volumes

Demand for durable goods increased. The pandemic shifted Americans’ spending from eating out and attending events to office furniture, electronics and kitchen appliances – mostly purchased online. The spending was also encouraged by government stimulus programs.

Strained supply chains. Factory goods swiftly overwhelmed U.S. ports. Swelling orders further outstripped the availability of shipping containers, and the cost of shipping a container from Shanghai to Los Angeles skyrocketed tenfold.

Labor shortages. Businesses across the economy, meanwhile, struggled to hire workers, including the truck drivers needed to haul cargo to warehouses. Even as employers resorted to lifting wages, labor shortages persisted, worsening the scarcity of goods.

Component shortages. Shortages of one thing turned into shortages of others. A dearth of computer chips, for example, forced major automakers to slash production, while even delaying the manufacture of medical devices.

A lasting problem. Businesses and consumers reacted to shortages by ordering earlier and extra, especially ahead of the holidays, but that has placed more strain on the system. These issues are a key factor in rising inflation and are likely to last for months — if not longer.

At the same time, Mr. Chadha said, they have not had to raise their prices as much as smaller retailers, and are likely to benefit as lower-income consumers search for value to stretch their dollars.

“They are taking market share because they have the ability to price lower and absorb that hit to the margin a lot better than some of the smaller, weaker retailers,” he said.

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