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Economic & Housing Weekly Note

Retail Sales and Business Optimism Fall in December

January 15, 2021

Key Takeaways:

  • Retail sales and food services fell 0.7 percent in December, the third consecutive month of decline, according to the Census Bureau. However, both motor vehicle and part sales, as well as sales at gas stations, increased, rising 1.9 percent and 6.6 percent, respectively, which offset declines elsewhere. Sales at building supply stores rose 0.9 percent, a boon for residential investment. Sales at food services/drinking places dropped 4.5 percent, as restrictions on restaurants were reimplemented. Core retail sales (excluding food services, autos, building supplies, and gas stations) fell 1.9 percent, the largest decline since April. Sales at nonstore retailers plunged 5.8 percent, while department store and hobby store sales also declined. From a year ago, retail sales and food services increased 2.9 percent.
  • The University of Michigan Consumer Sentiment Index dropped 1.5 points in the preliminary January reading to 79.2. Both the current economic conditions index and the consumer expectations index fell.
  • The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 5.5 points in December to 95.9, the lowest reading since May and tying the largest decline since April. The net share of firms expecting the economy to improve fell by 24 percentage points, the second largest decline in series history, to negative 16 percent, the lowest net share since April 2016. The share of firms planning on increasing employment, increasing capital expenditures, and expecting real sales to be higher all fell.
  • Industrial production, a gauge of output in the manufacturing, utility, and mining sectors, increased 1.6 percent in December, according to the Federal Reserve Board, though the index remains 3.3 percent below the level seen in February. Manufacturing, mining, and utilities production all increased. Capacity utilization increased 1.1 percentage points to 74.5 percent.
  • The Consumer Price Index (CPI) rose 1.4 percent from a year ago in December, an acceleration of two-tenths from the prior month, according to the Bureau of Labor Statistics. Core CPI (which excludes food and energy prices) increased 1.6 percent from a year ago, the same pace of growth as the prior two months.
  • Initial claims for unemployment insurance grew by 181,000 to 965,000 in the week ending January 9, the highest level since the end of August 2020, according to the Department of Labor. The four-week moving average rose by 18,250 to 834,250.
Forecast Impact:

The December pullback in retail sales, along with the decline in business optimism and consumer sentiment, highlight the effect on the economy that the increase in COVID-19 cases and the uncertainty around the pace of vaccine administration is causing. As cases continue to rise, different states and localities are reimplementing restrictions on bars and restaurants to try to combat the spread. This led to a sharp decline in sales at food service establishments in December. The weakness in retail sales supports our expectation of slower consumer spending in the fourth quarter of 2020, along with much weaker spending in the first quarter of 2021. The increase in initial unemployment claims is concerning and suggests a similar dynamic, though we believe that many of these new claims are due to the renewal of restrictions in the leisure and hospitality sector and not indicative of a broader employment slowdown. There’s also the possibility that this is a result of a mistake with the seasonal adjustment around the holidays, given the highly unusual circumstances. We believe the large decline in firms expecting the economy to improve is likely due to uncertainty surrounding the new administration’s policies, as well as the disappointing pace of vaccine distribution, leading many to believe that we may be well into 2021 before a majority of Americans are vaccinated. In our view, these dynamics could lead to weaker-than-expected business investment in the coming months. However, industrial output remains healthy, suggesting that these concerns are likely temporary and/or confined to small business specifically.


Ricky Goyette
Economic and Strategic Research Group
January 15, 2020

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.