Retail Sales Were So Bad, It's Either Suspect Data Or A Recession Warning

The sudden and unexpected plunge in December's retail sales data raised new concerns about a recession, but economists also say the biggest drop in nine years clashes with other data and may be suspect.

But nonetheless, Wall Street still took the data seriously and economists slashed fourth quarter GDP forecasts. JP Morgan cut its growth estimate to 2 percent from 2.6 percent.

"This literally came from out of left field… I thought January would have been bad," said Chris Rupkey, chief financial economist at MUFG Union Bank. "All our reports earlier were that holiday sales were sparkling."

The Commerce Department said retail sales for December fell 1.2 percent, the largest decline since September, 2009 when the economy was exiting recession and shaking off the financial crisis. The report was delayed due to the government shutdown, and there is no release date for January sales data.

"This is against the backdrop of the only data we had, which was the blockbuster employment numbers," said Diane Swonk, chief economist at Grant Thornton. "If the world was that bad, that was the place we should have seen it and we didn't. It leaves us all scratching our heads. It's suspect, highly suspect."

The report was expected to show a 0.2 percent gain in retail sales, and Swonk says it is subject to revision. Excluding automobiles, gasoline building materials and food, the core retail sales fell 1.7 percent, after a revised 1 percent jump in November. According to the report, December online and mail-order retail sales actually fell 3.9 percent, the biggest drop since November 2008, after increasing 2.8 percent in November.

Even though the report looks suspect, economists were not dismissing it outright, as there were factors in December that could have weighed on consumers, like the sharp and violent drop in the stock market in a month that usually sees stock market gains. The 35-day government shutdown also began in late December and ended Jan. 25, but it is more likely to have impacted sentiment than actual retail sales, at least in December.

The data also conflicts with other reports of holiday shopping, including Mastercard SpendingPulse, which said holiday sales rose 5.1 percent from Nov. 1 to Dec. 26, the best in six years, and online sales rose 19.1 percent.

"It could be a reaction to the stock market…the lesson from that is stocks recovered and we're looking pretty good. Maybe we can come back from this, but it will be critical to see what happens with the Trump administration negotiations with China. We can't take another blow. The market and now Main Street can't take the uncertainty coming out of Washington," said Rupkey. "This is not just a pot hole. It is a major roadblock on the way forward. It really makes us question the outlook this year."

During December, Fed officials also added to the uncertainty. They raised interest rates on Dec. 19, and Fed Chairman Jerome Powell indicated the Fed would continue on its policy path to shrink its balance sheet.

But that spooked an already uneasy market, and Fed offiicials soon reversed course, and started sending signals that they could pause rate hiking, something that was reinforced in the January post-meeting statement.

Adding to the dismal news in retail sales Thursday, weekly jobless claims rose for the week ending Feb. 8 fell by 4,000 to 239,000 the third consecutive week of gains after hitting a 49-year low on Jan. 19. Jobless claims are watched even more carefully than monthly employment reports since they are the most current data available on the labor market.

"It is harder to blame lingering shutdown effects or the L.A. teachers strike for this morning's figure, and the move up in the four-week average to 232,000 lends further weight to the notion that the job market may be cooling after the very strong January employment report," wrote JP Morgan economists.