Retail sales rose 0.5% in December, after being revised up in November. Vehicle sales continued to drive overall gains; insurance claims for autos, following damages from Superstorm Sandy, were among the first to be paid. There were also strong gains in furniture sales, which no doubt got a boost from Sandy and some of the recent strength in housing. There was some holiday cheer, with people going out a little more. The worst flu season in years, however, tempered some of those gains as people were forced to get what remedies and flu shots they could at their local drug stores.
The greatest weakness was in gasoline station sales, which fell on lower gas prices. Building material stores also saw a pause after the scramble from Sandy but are likely to regain momentum in the months ahead. Big box retailers were the true losers, as consumers were extremely cautious and only shopped the sales, even at discount retailers.
Separately, the producer price index slipped 0.2% in December on the heels of lower food and energy prices. We are finally getting past the surge in food prices that we saw in response to last summer’s drought. Prices excluding food and energy rose a modest 0.1% for the month. There were some increases in energy prices in the pipeline, especially as natural gas prices firmed, which could push this index up a bit in the months to come. These figures continue to confirm the view, however, that decelerating inflation remains a greater concern than accelerating inflation. This will keep the Fed in the game of buying assets for some time this year.
Bottom Line: Consumers are still out there but more cautious. Rebuilding associated with Sandy, combined with moderate employment gains, is likely to provide some support for consumer spending in 2013. We will need to see a major bounce back in investment, however, if we really want to see a pickup in momentum this year, and that includes housing.