Last Friday, the December U.S. retail sales showed that the American consumer remains reluctant to spend. This is normal behavior during uncertain times as consumers choose to save a bigger portion of their income until the economy recovers.
For December, the economists expected the retail sales to be flat when compared to the earlier month. However, they declined by -0.7% on a monthly basis. Moreover, the core release, which excludes automobiles, declined even more, by -1.4%. To make things worse, the November data was also revised lower.
Retail Sales – One of the Most Important Metric to Interpret Economic Growth
For traders, the retail sales data is crucial in understanding the way an economy fares. Because the consumer spending is the engine of economic growth, changes in the spending dynamics are crucial for the economy, and thus for the market.
The pandemic changed the way people spend their money, and thus consumer behavior changed. There is also another element to consider – helicopter money.
One of the main reasons why governments use fiscal stimulus is to stimulate spending. Now that people are forced to spend more time isolated to fight the spread of the virus, finding a job is difficult. Everyone talks about working online and remote, but some jobs simply cannot transfer online.
As such, the government in the United States and other parts of the world chose to send financial help to households. In the United States, it took the form of direct checks sent to families to support them through the crisis.
In reality, the government knows that it is far more expensive not to do so. The imminent economic collapse would be so strong that the economic recovery will take longer. As such, sending people direct checks is just another way of delivering, say, a tax cut.
The problems come from what the consumer chooses to do with the money. If the consumer saves the most of it, as it did, then the economic recovery is delayed. On top of that, the money supply grows considerably because the U.S. government runs a deficit, thus borrowing the money for the stimulus.
All in all, the December data showed that the economy is far from recovery. Only a sustained rising trend in retail sales indicates economic growth. Until that happens, recessionary conditions prevail.