People in the US stepped up their spending at retailers in December, closing out the holiday shopping season and the year on an upbeat tone and signalling that people remain confident enough to keep spending freely.
Retail sales accelerated 0.6% in December from November's 0.3% increase, the US Commerce Department reported earlier this week, highlighting the country’s economic momentum as it heads into the new year.
As spending by consumers accounts for nearly 70% of the US economy (compared to just 50% of the EU and euro areas’), the report suggested that shoppers will be able to keep fueling economic growth this year.
Among last month's overall retail purchases, sales at stores that sell general merchandise rose 1.3%. Sellers of clothing and accessories reported a 1.5% increase, as did online sellers. By contrast, furniture and home furnishings businesses declined 1%, reflecting a struggling housing market. Sales at restaurants were unchanged in December.
In comparison, European sales data over the same period are not as positive, suggesting consumers’ cautiousness. Yearly retail sales fell by 1.1%, extending a 14-period trend of contraction.
Persistent consumer pessimism contrasts with encouraging economic data
US economists had expected consumers to pull back on spending in the final three months of the year under the weight of credit card debt, delinquencies and lower savings. Yet despite those challenges, along with higher borrowing costs, tighter credit conditions and price increases, household spending is being fueled by a strong job market and rising wages.
The healthy rise in purchasing last month also highlights an apparent contradiction at the heart of the economy: surveys suggest that US citizens feel sour about the economy overall and exasperated by the increased cost of food, rent, cars and other items over the past two years. Yet the ongoing strength of their spending seems to point towards confidence in the economy and their own finances.
Inflation has cooled significantly since peaking at 9.1% in mid-2022. But costs can still flare. Higher energy and housing prices boosted the overall US inflation in December, a sign that the Federal Reserve’s drive to slow inflation to its 2% target will likely remain a bumpy one.
According to the White House, it remained at 3.4% for the year 2023, exactly the same as the EU annual rate, but above the euro area’s 2.9%. Both Europe and the US went through a staggering disinflation last year, going from two-digit rates to more reasonable figures.
Meanwhile, polls show many Americans are still pessimistic. A major factor is the lingering financial and psychological effects of the worst bout of inflation in four decades. Much of the public remains exasperated by prices that, despite falling inflation, remain 17% higher than they were before prices began to surge.
Historically high interest rates
On Wednesday, Christopher Waller, a key member of the US Federal Reserve’s (Fed) board of governors, said that as long as the economy remains healthy, the central bank can proceed cautiously as it determines when and by how much to cut its benchmark interest rate. His remarks were seen by economists and investors as downplaying the potential for a rate cut as early as March, which Wall Street investors and economists had expected.
In July, the Fed raised its rates to a 22-year-high, to a range between 5.25% and 5.50%. The next board meeting to determine interest rates is set to take place on January 30-31.
Meanwhile, in Europe interest rates also remain high, with the latest meeting of the European Central Bank (ECB) governing council maintaining the main refinancing operations at 4.50%, the marginal lending facility at 4.75%, and the deposit facility at 4.00%.
From the World Economic Forum in Davos, the ECB’s President Christine Lagarde mirrored her American counterpart's cautious optimism and hinted at potential rate cuts this year.
Source: euronews
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