After a string of better than expected economic indicators from third quarter GDP, December employment, and broadly improving small business sentiment, the retail sales decline of 0.9 percent in December was a disappointment.
On an annualized basis, retail sales, excluding vehicles and parts, declined 11.4 percent in December, the biggest monthly decline since March 2009. As a result, we have lowered our tracking estimate of real GDP for the fourth quarter to 3.2 percent and consumer spending to 3.8 percent. Despite a drop in retail sales in December, we remain optimistic that sales will rebound in the coming months due to increased discretionary personal income, improving labor market conditions, and stronger consumer confidence looking ahead into 2015.
Meanwhile, deflationary pressures continue to build. Import prices fell a sharp 2.5 percent in December from a downwardly revised 1.8 percent a month ago. The Import price index is down 5.5 percent from a year ago, the biggest percentage decline since October 2009. Deteriorating import prices was primarily driven by lower fuel prices that contracted 15.1 percent in December following an 8.7 percent decline in November. But even excluding petroleum, import prices were down 0.1 percent over the month, and flat from a year ago.
Falling import and export prices once again highlight the deflationary concerns that some Fed policy makers have. But will it be enough to delay the Fed’s expected Fed funds rate lift-off around mid-year? The Fed has a few more months to consider additional inflation data before they need to make a definitive decision one way or the other.
Fortunately, other economic data released this week offer strong evidence of further economic expansion in the near term. In particular, we received solid data on small business optimism in December that increased the most since October 2006, reaching 100.4.
The U.S. economic outlook remains a positive one, but growth is expected to downshift a bit in the first half of 2015 as exports, manufacturing, and business investment are impacted by the strong dollar, weak global growth, and lower oil prices. The Fed will also have to keep one eye on deflation risks as weaker trade prices signal deflationary pressures won’t stay in Europe.
To find out more check out this week’s US Outlook Report.Tags: economy