U.S. retail sales lifted by boosts in pay, confidence

Americans stepped up their auto buying and online shopping in December, reflecting a boost in confidence after the election and a solid increase in pay.

Retail sales rose a seasonally adjusted 0.6%, following a small 0.2% gain in November, the Commerce Department said Friday.

Auto sales jumped 2.4% in December, the biggest gain since April. Gas station sales rose 2%, largely because of higher prices. Excluding autos and gas, retail sales overall were flat.

But online retailers in particular reported better sales. Home and garden centres, furniture stores and sporting goods retailers also saw sales grow.

The healthy spending was likely fueled by soaring consumer confidence, which has jumped after the election to the highest level in nearly a decade. Small businesses are also more bullish. And Americans’ paycheques are getting fatter: average hourly pay rose 2.9% in December from a year earlier, the most in seven years.

Still, Royce Mendes, director at CIBC World Markets, is cautious. In a research note, he says, “Retailing didn’t begin the holiday season on a positive note and, aside from auto sales, it didn’t end on one either. […] As we had expected, one of the major contributors to the increase in December were non-store [online] retailing, reflecting the secular trend toward internet purchases.”

He adds, “While 2016 was a strong year for household spending, the last two months didn’t reflect a big pickup in holiday related spending. Separately, producer prices were generally in line withe expectations as the annual rate of PPI accelerated to 1.6% from 1.3%. All told, the retailing numbers were a bit of disappointment and should be positive for fixed income and negative for the US dollar.”

The Associated Press reports the data reflects the ongoing struggles of traditional brick-and-mortar retail chains as Internet merchants gobble up more market share. Department store sales fell 0.6% and electronics and appliance stores reported a 0.5% drop.

Yet sales jumped 1.3% in a category that mostly consists of online retailers but also catalogue companies. For all of 2016, online sales jumped 13.2%, three times the gain of all retail sales.

Those trends were sharply in focus in the past two weeks as clothing retailer The Limited announced that it would close all 250 of its stores, costing 4,000 jobs. That followed department store chain Macy’s decision to close 68 stores and cut 10,000 jobs. Sears also said last week that it would close another 150 stores.

Amazon, meanwhile, said Thursday that it would add 100,000 jobs over the next 18 months.

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In related news, U.S. wholesale prices rose 0.3% in December, led higher by more expensive gas, food and cars.

The Labor Department says the producer price index, which measures price changes before they reach consumers, increased 1.6% last year. That’s the biggest 12-month gain since September 2014. Still, it is low historically and suggests inflation is largely in check.

The Federal Reserve has begun to slowly raise interest rates as the economy heals and is keeping a close eye on inflation. With wages starting to increase more quickly, companies may raise prices to offset those costs. Yet wholesale price increases remain below the Fed’s target of 2%.

December’s gain was led by a big climb in wholesale gas prices, which rose 7.8%.