Lackluster U.S. retail sales cast shadow on fourth-quarter economic growth

WASHINGTON (Reuters) – U.S. retail sales increased less than expected in November as Americans cut back on discretionary spending despite a strong labor market, raising fears the economy was slowing a bit faster than anticipated in the fourth quarter.

The report from the Commerce Department on Friday bucked a recent raft of fairly upbeat data on the labor market, housing, trade and manufacturing that had suggested the economy was growing at a moderate speed despite headwinds from trade tensions and slowing global growth.

The Federal Reserve on Wednesday kept interest rates steady and signaled that borrowing costs were likely to remain unchanged at least through next year amid expectations the economy would continue to grow modestly and the unemployment rate remain low.

“Just when it looked like the economy was getting stronger, consumers faltered in November,” said Chris Low, chief economist at FHN Financial in New York. “Because consumption accounts for the lion’s share of GDP these days, a consumer spending slowdown is a concern, especially in the fourth quarter, when consumption is seasonally strongest.”

Retail sales rose 0.2% last month. Data for October was revised up to show retail sales increasing 0.4% instead of climbing 0.3% as previously reported. November’s meager sales gains are at odds with reports from retailers of brisk Black Friday business.

Economists speculated that a late Thanksgiving this year compared to 2018 pushed some sales into December and could have thrown off the model that the government uses to strip seasonal fluctuations from the data, holding back sales. Some believed the data would be revised higher when the government publishes December’s retail sales report in January.

Economists polled by Reuters had forecast retail sales would accelerate 0.5% in November. Compared to November last year, retail sales increased 3.3%.

Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1% last month after rising by an unrevised 0.3% in October. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9% annualized rate in the third quarter. As a result of November’s small rise in core retail sales some economists trimmed their GDP growth estimates for the fourth quarter to below a 1.5% rate from around a 1.8% pace. The economy grew at a 2.1% pace in the third quarter.

“As a result, real consumption growth appears to have slowed to between 1.5% and 2.0% (rate) in the fourth quarter, a little weaker than we had anticipated,” said Andrew Hunter, a senior economist at Capital Economics in London. “The risks to our forecast that overall GDP growth was 1.5% may also now lie slightly to the downside.”

Slowing consumer spending is boosting inventories at retailers, which could limit the downside to fourth-quarter GDP growth. In a separate report on Friday, the Commerce Department said retail inventories excluding autos, which go into the calculation of GDP, increased 0.7% in October after rising 0.2% in September.

U.S. stocks rose after China announced that major progress had been achieved on a “Phase One” trade deal with the United States. Long-dated U.S. Treasury yields turned higher while the dollar .DXY pared earlier losses against a basket of currencies.

IMPORTED INFLATION SUBDUED

Despite the slim gains in retail sales in November, consumer spending likely remains supported by a strong labor market. The government reported last week that the economy created 266,000 jobs in November and the unemployment rate fell back to 3.5%, its lowest level in nearly half a century.

Last month, auto sales increased 0.5% after rising 1.0% in October. Higher gasoline prices lifted receipts at service stations by 0.7%. Online and mail-order retail sales increased 0.8% after increasing 0.6% in October.

Sales at electronics and appliance stores increased 0.7%. Receipts at building material stores were unchanged and sales at clothing stores fell 0.6%. Spending at furniture stores edged up 0.1%. Americans cut back on spending at restaurants and bars, with sales falling 0.3%.

Receipts at healthcare and grooming stores also fell. Spending at hobby, musical instrument and book stores dropped 0.5%.

A third report from the Labor Department on Friday showed imported inflation remained subdued in November. Import prices increased 0.2% last month, lifted by higher prices for petroleum products, after declining 0.5% in October.

Import prices exclude tariffs. Last month’s increase in import prices was in line with economists’ expectations. In the 12 months through November, import prices decreased 1.3% after dropping 3.0% in October.