The 1970s and stagflation are back in a bad way – that is how some may have reacted to the fall in US Retail Sales in December. Consumption tumbled by 2.3%, far worse than expected, while the Control Group – the core of the core – suffered a deeper plunge of 3.1%.
Stagflation is a portmanteau word combining inflation and stagnation. In the 1970s, higher prices caused people to buy less, dragging the economy into stagnation. As prices rose by 7% YoY in December, that narrative may now emerge.
Another explanation is that the Omicron variant caused people to refrain from the activity. After all, thousands of flights were canceled due to staff shortages, and other economic activities may have ground to a halt as well.
Both theories are logical explanations, but only tell part of the story. Between the pandemic and inflation lie supply-chain issues, which were magnified by warnings of empty shelves or delays to shipments. Consumers rushed to the shops – online and offline – earlier in the autumn, and gobbled up un gifts. That means an early Christmas party and a hangover when trees were put in their place.
A look into the not-so-distance history reveals another picture. Back in December 2018 – without any pandemic or other disruptions – retail sales crashed by 2.8%. That is worse than the current fall.
While such slides did not happen in 2019, there seems to be a shift in consumer behavior that is not fully captured by the models. Black Friday comes early and is accompanied by China’s “Singles’ Day” sales on November 11. Seasonal adjustments have yet to catch up with changing consumer preferences.
The devastating news from an area which represents 70% of the economy is weighing on stocks, but they were in the red beforehand as well. The dollar is benefiting from safe-haven flows, but only just.
For the Federal Reserve, it is just one data point that does not represent a struggling economy, at least not yet. Trends in inflation and unemployment, the bank’s mandates, are far more important.
For stocks, company earnings are now in focus, and for the dollar, inflation and speculation on the Fed’s reduction of its balance sheet matter more. These factors cold be dollar positive – alongside profit-taking on dollar shorts.