Resilience not recession is the right “R” word to describe the American economy in December. Wednesday’s data from the Commerce Department showed retail sales blowing past expectations while industrial production volume stayed solid.
The upside surprises, together with a robust labor market, prompted us to revise our forecast of gross domestic product for the final quarter up to 2.4%, from 2.1%. The first estimate of fourth quarter GDP will be released on Jan. 25.
Since the retail sales data mostly includes spending on goods, there might be more upside surprise on how strong American consumers have been once the personal spending data—which includes service spending as well—is released on Jan. 26.
Certainly, the market’s pricing for the Federal Reserve to begin rate cuts in March seems premature given the strength of the economy. Our call for rate cuts to begin in June looks a lot more reasonable by the day.
Inside the data, overall retail sales increased by 0.6% in December, followed by a 0.8% increase for the control group—which strips away the more volatile components and feeds directly into GDP calculation. Those figures were significantly higher than what the market had expected at 0.4% and 0.2%, respectively.
Read more of RSM’s insights on the economy and the middle market.
Rising spending on autos (up by 1.1%), clothing (1.5%), online (1. 5%) and at department stores (3%) were the main drivers of the sharp increases.
Most categories posted gains on the month. Those categories that fell included furniture (down by 1%), electronics (0.3%), gasoline (1.3%) and health care (1.4%).
American consumers must have felt reasonably good with their finances to maintain such levels of spending. Continuing disinflation and lower gasoline prices should help as well. We think that the data on consumer sentiment, which will be released on Friday, will reflect a sharp improvement.
Industrial production
In a separate report on Wednesday, industrial production increased by 0.1% in December while November’s number was revised downwardly to unchanged, according to Federal Reserve data. Manufacturing rose by 0.1% while utilities dropped by 1% and mining rose by 0.9%.
While the numbers continued to point to solid production activity, most of the declines registered were from utilities and electronics, reflecting a warmer December and a shift among consumers away from electronics to other items. The data from retail sales also supported this explanation.
Capacity utilization was unchanged at 78.6% after November’s figure was revised down from 78.8%.
