Is Slowing Consumer Spending in December a Red Flag for the Economy?

Retail sales in the US remained unexpectedly flat during the December holidays, raising concerns about consumer spending and signalling potential economic slowdown. Despite a robust spending trend in previous months, factors such as a faltering labour market, ongoing inflation, and cooling wage growth contributed to this lacklustre performance. The report from the Commerce Department highlights a shift in consumer behaviour, leaving many to speculate about the future trajectory of the economy.

Last updated: 07 October 2023 (BST)

What’s happening now

The recent report on retail sales indicates a significant moment for the US economy. For December, retail sales were unchanged from the previous month, following a 0.6% rise in November. This flatlining suggests that consumers may be pulling back on spending, which is traditionally a critical driver of the economy. The report, released after delays due to last year's government shutdown, coincides with other forthcoming economic indicators, including labour market reports and fourth-quarter growth estimates.

Key takeaways

Retail sales in December were flat, breaking a trend of robust consumer spending.
Factors like inflation, labour market concerns, and wage growth are affecting consumer behaviour.
High-income consumers continue to spend, while lower-income households are prioritising necessary purchases.

Timeline: how we got here

The retail sales report and its implications can be traced through several key milestones:

November 2022: Retail sales increased by 0.6%, reflecting strong consumer spending.
December 2022: Retail sales flatlined, indicating a potential consumer pullback.
January 2023: Upcoming reports on the labour market and economic growth are expected, providing further clarity on economic conditions.

What’s new vs what’s known

New today/this week

The latest retail sales data for December reveals a stark change in consumer spending habits, reflecting a potential shift in economic dynamics. Analysts have highlighted the impact of inflation and stagnant wage growth on consumer behaviour, contributing to a cautious approach among shoppers.

What was already established

Prior to this report, consumer spending had shown resilience despite waning economic sentiment, with significant increases recorded in previous months. The flat sales figures in December suggest that this trend may not be sustainable, particularly as inflation continues to rise and wage growth slows.

Impact for the UK

Consumers and households

While the US retail landscape is distinct from the UK, the implications of flat retail sales could resonate across the Atlantic. UK consumers may experience similar pressures if inflation and wage growth trends mirror those observed in the US. Households could face increased living costs with less disposable income available for non-essential spending.

Businesses and jobs

In the UK, businesses reliant on consumer spending might see a slowdown in sales if economic conditions deteriorate. Retailers may need to adapt their strategies to cater to changing consumer priorities, focusing more on essential goods as discretionary spending declines.

Policy and regulation

The UK government may monitor these developments closely, as they could signal broader economic trends that necessitate policy adjustments. Should consumer spending wane significantly, this could prompt discussions about fiscal measures to support the economy.

Numbers that matter

0.0%: Retail sales change in December compared to November.
2.4%: Year-over-year increase in retail sales for December, down from 3.3% in November.
0.7%: Wage growth in the fourth quarter, the slowest rate in over four years.
4.4%: Unemployment rate in December, indicating modest job growth.
66%: Percentage of US economic activity driven by consumer spending.

Definitions and jargon buster

Retail Sales: The total sales of goods and services by retailers, a key indicator of consumer spending.
Labour Market: The supply of available workers in relation to the demand for them.
Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.

How to think about the next steps

Near term (0–4 weeks)

In the immediate future, it will be crucial to monitor upcoming economic reports on the labour market and fourth-quarter growth. These indicators will provide insights into whether December's flat sales are part of a larger trend or a temporary setback.

Medium term (1–6 months)

As tax refund season approaches, there may be an uptick in consumer spending, particularly if labour market conditions stabilise. Observing how consumers respond to changing economic signals will be key.

Signals to watch

Changes in unemployment rates and job creation numbers.
Inflation rates and consumer price indices.
Consumer sentiment and spending trends in upcoming retail reports.

Practical guidance

Do

Keep an eye on economic indicators that may affect your financial situation.
Prioritise essential spending and budget accordingly.
Stay informed about government policies that could impact economic conditions.

Don’t

Ignore signs of economic slowdown; be proactive in managing finances.
Overextend on credit; focus on savings and essential purchases.
Assume that past spending trends will continue unchanged.

Checklist

Monitor your local economic news for updates on retail sales and consumer spending trends.
Review your monthly budget and adjust for any changes in income or expenses.
Evaluate discretionary spending options in light of economic uncertainties.
Consider diversifying income sources if feasible.
Engage with community resources for financial advice and support.

Risks, caveats, and uncertainties

While the December retail sales report indicates a potential shift in consumer behaviour, it is important to acknowledge uncertainties that could impact future trends. External factors such as geopolitical events, changes in government policy, or unforeseen economic shocks could alter spending patterns significantly. Analysts caution against making definitive predictions based on a single month’s data.

Bottom line

The flat retail sales in December signal a potential shift in consumer spending that could have broader economic implications. With inflation pressures and stagnant wage growth, UK consumers may face similar challenges. Staying informed and adapting financial strategies will be essential as we move into the new year.

FAQs

What does the flat retail sales report mean for consumers?

The flat retail sales report suggests that consumers may be pulling back on spending, which could indicate economic uncertainty. It reflects changing consumer priorities amid inflation and wage concerns.

How does consumer spending affect the economy?

Consumer spending is a key driver of the economy, accounting for over two-thirds of economic activity. Changes in spending habits can significantly influence economic growth and stability.

What should consumers do in light of these economic changes?

Consumers should prioritise essential spending, monitor economic indicators, and adjust their budgets to prepare for potential economic fluctuations.