U.S. Retail Sales Post Biggest Drop In 11 Months; Labor Market Tight

U.S. retail sales fell more than expected in November, but consumer spending remains supported by a tight labor market, with the number of Americans filing for unemployment benefits decreasing by the most in five months last week.

The biggest decrease in retail sales in 11 months reported by the Commerce Department on Thursday was likely payback after sales surged in October as Americans started their holiday shopping early to take advantage of discounts by businesses desperate to clear excess inventory.

Still, the weakness in sales suggested higher borrowing costs and the threat of an imminent recession were starting to have an impact on household spending.

"The lack of follow-through into November suggests consumers are being much more cautious with their money amid recession fears and the draining effect of overall high inflation and sharply rising borrowing costs," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Retail sales dropped 0.6% last month, the biggest drop since December 2021, after an unrevised 1.3% jump in October. Economists polled by Reuters had forecast sales dipping 0.1%.

Retail sales, which are mostly goods and are not adjusted for inflation, increased 6.5% year-on-year in November. Consumers have been drawing down savings to fund purchases. The saving rate was at 2.3% in October, the lowest since July 2005.

Sales at auto dealers fell 2.3% last month as motor vehicles remain in short supply. Receipts at service stations dipped 0.1%, reflecting lower gasoline prices.

The boost from one-time tax refunds in California, which saw some households receiving as much as $1,050 in stimulus checks in October, and Amazon's second Prime Day faded last month.

Other factors which hurt sales included the rotation in spending back to services and discounting by retailers eager to lure cash-strapped consumers to clear unwanted inventory.

Online retail sales decreased 0.9%. Furniture stores sales dropped 2.6%. Sales at food services and drinking places, the only services category in the retail sales report, increased 0.9%. Electronics and appliance store sales fell 1.5%.

There were also decreases in receipts at general merchandise stores as well as sporting goods, hobby, musical instrument and book stores. Clothing stores sales fell 0.2%.

The Federal Reserve on Wednesday raised its policy rate by half a percentage point and projected at least an additional 75 basis points of increases in borrowing costs by the end of 2023. This rate has been hiked by 425 basis points this year from near zero to a 4.25%-4.50% range, the highest since late 2007.

Excluding automobiles, gasoline, building materials and food services, retail sales slipped 0.2% last month. Data for October was revised lower to show these so-called core retail sales increasing 0.5% instead of 0.7% as previously reported.

U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

STRUCTURAL LABOR SHORTAGE

Core retail sales correspond most closely with the consumer spending component of gross domestic product.

The weakness in core retail sales is likely to be offset by gains in services outlays, keeping consumer spending and the overall economy on a moderate growth path this quarter. The economy grew at a 2.9% annualized rate in the third quarter after contracting in the first half of the year.

Consumer spending continues to be underpinned by labor market tightness, which is keeping wages elevated.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits declined 20,000 to a seasonally adjusted 211,000 during the week ended Dec. 10. Last week's decrease in claims was the largest since July and pushed them to a three-month low.

Economists had forecast 230,000 claims for the latest week.

Claims have stayed below the 270,000 threshold, which economists said would raise a red flag for the labor market, despite a wave of layoffs in the technology sector.

Businesses are generally reluctant to lay off workers, having struggled to find labor in the aftermath of the COVID-19 pandemic, a fact that was acknowledged by Fed Chair Jerome Powell on Wednesday.

Powell described the labor market as "extremely tight," adding "it feels like we have a structural labor shortage out there." There were 1.7 job openings for every unemployed person in October.

The claims report also showed the number of people receiving benefits after an initial week of aid, a proxy for hiring, rose 1,000 to 1.671 million in the week ending Dec. 3. While that was the highest reading since February, the pace of increase in the so-called continuing claims has slowed from prior weeks.