Weaker-than-expected retail sales in November pummeled market sentiment on Thursday and raised the odds that the Federal Reserve's inflation-fighting interest rate hikes would push the economy into recession.
What's happening: US retail sales, which measure the total amount of money that stores make from selling goods to customers, fell 0.6% in November, the weakest performance in nearly a year. The drop concerned economists who had expected monthly sales to shrink by just 0.1%. It's also a sharp reversal from October's sales increase of 1.3%.
That's a bad sign for the economy. Just last month Bank of America CEO Brian Moynihan told CNN that the continued strength of the consumer is nearly single-handedly staving off recession in the US. Consumer spending is a major driver of the economy, and the last two months of the year can account for about 20% of total retail sales — even more for some retailers, according to National Retail Federation data.
Market mania: The weak report means that spending faltered just as the holiday season started, a critical time for retailers to ramp up profits and get rid of excess inventory. Investors weren't too happy about that.
Shares of Costco closed Thursday 4.1% lower, Target fell by 3.2%, Macy's dropped 3.5% and Abercrombie & Fitch was down 6.2%.
The entire sector took a blow — The VanEck Retail ETF with Amazon, Home Depot and Walmart as its top three holdings, fell by 2.2%. The SPDR S&P Retail ETF, which follows all S&P retail stocks, was down 2.9%.
Weak sales are likely to continue, say analysts, and if they do retailers' bottom lines and fourth quarter earnings will suffer.
"The headwinds of the past year are catching up to consumers and forcing them to be more conservative in their holiday shopping this winter," warned Morgan Stanley economist Ellen Zentner in a note.
The Fed factor: November's report could indicate that consumers are feeling the double-punch of sky-high inflation and painful interest rate hikes from the Federal Reserve.
The Federal Reserve, in an effort to keep inflation in check, has been raising interest rates and slowing economic growth. Many economists fear that these policies will soon push the economy into recession. This retail sales data adds to recessionary concerns, as it suggests that consumers may be becoming more cautious with their spending.
"Households are increasingly relying on their savings to sustain their spending, and many families are resorting to credit to offset the burden of high prices. These trends are unsustainable, and the current credit splurge is a true risk, especially for families at the lower end of the income spectrum," said Gregory Daco and Lydia Boussour, economists at EY Parthenon.
While American bank accounts are still fairly robust, they're beginning to dwindle. In the third quarter of 2022, credit card balances jumped 15% year-over-year. That's the largest annual jump since the New York Fed began keeping track of the data in 2004.
"Against this backdrop, we expect consumers will rein in their spending further in coming months," said Daco and Boussour. "Real consumer spending should see modest growth in the final quarter of the year, but we expect it will barely grow in 2023."
Bottom line: If Bank of America's Moynihan was right, the US economy is in trouble.
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