US economy is losing momentum as retail sales record the largest drop in 12 months
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Retail sales in the US dropped by the highest level in a year in December amid a drop in motor vehicle purchases and other goods. Consumer spending and the economy are currently on a weak growth path in 2023.
US economy loses momentum as retail sales drop
The drop was the second consecutive decline in retail sales, mainly goods. The drop resulted in manufacturing output declining by the highest level in nearly two years in December, while the monthly producer prices also declined.
The weakening demand and the dropping inflation levels could see the Federal Reserve pulling back on the interest rate hikes. However, the Fed is not expected to halt the monetary tightening soon because of the labor market situation. The Federal Reserve has been hiking interest rates at the fastest rate since the 1980s.
Retail sales dropped by 1.1% last month, representing the largest drop since December 2021. The revised data from November also showed that sales were dropping, which now stand at 1% compared to the previous 0.6%. The forecast sales also declined by 0.8%, while the retail sales increased by 6% year-on-year in December.
The decline in sales in December resulted from the drop in prices during the month. Consumers also did their holiday shopping in October, taking advantage of discounts because of the rising inflation. Despite the low gasoline prices that affected the receipts at service stations, indicating that spending had gone back to services.
High interest rates attributed to reduced spending
The high interest rates have increased the cost of credit that Americans mainly use to finance the purchase of goods. This has eroded retail sales in recent months. on Wednesday, a Beige Book report by the Federal Reserve said that consumer spending was increasing slightly, as some retailers reported solid sales during the holidays.
The sales reported by auto dealers dropped by 1.2%, while the receipts at service stations dropped by 4.6%. Online retail sales also plunged by 1.1%, while restaurant receipts dropped by 0.9%. Sales in electronics and appliance stores also dropped by 1.1%.
More dips were reported in clothing stores and general merchandise stores. Sporting goods, hobby, and musical stores reported gains. Similar gains were also seen in building materials and garden equipment products.
In 2022, the Fed raised interest rates by 425 basis points to between 4.25% and 4.50%. This was the highest increase since 2007. The Fed has also predicted another 75 basis points hike in borrowing costs by the end of 2023. Financial markets expect that in the January 31-Febryuary 1 meeting, the Fed will hike interest rates by 25 basis points.