A strong retail sales report was released Friday morning, showing improvement in January from December 2015. It surprised some economists, who were expecting a more flat sales month. Core retail sales, excluding volatile items like automobile and gasoline sales were up too compared to the month before, contributing to the strong report.
Retail sales rose by 0.2 percent in January from December 2015, and core sales were up by 0.6 percent compared to December. The December report was also revised to a 0.2 increase in overall sales up from a decline of 0.1 percent, indicating that the quarter and year’s end was actually stronger than originally reported.
“In general I would characterize this as a very strong report this morning,” said Michael A. Brown, an economist at Wells Fargo.
He also noted that when broken down, the report supports an even stronger economy than the headline numbers indicate. Setting aside volatile items like automobile and gasoline sales, which can obscure the underlying trend, sales were up an impressive 0.6 percent for the month.
Gasoline station sales plunged 3.1 percent in the month, adding weight to the 0.2 increase in overall sales. “[This] makes January’s 0.2 percent increase in overall sales important given the headwind faced by retail sales due to lower gasoline prices,” senior economist Eugenio Alemán wrote in a Wells Fargo report.
Thomas Simons, a money market economist at Jefferies LLC, agrees that the modest growth this January belies strength under the hood of the economy.
“People were talking about the possibility of a recession and this goes against that as well,” he said.
Low gas prices meant consumers spent less at the pump, which dragged down overall sales. But that also gave them more money to spend elsewhere, which was reflected in stronger gains in other categories.
Gasoline station sales were down by 3.1% compared to December 2015, and by a whopping 8.1 percent compared to January of last year. Building materials picked up by 0.6 percent compared to last month, in alignment with trends in the housing market, such as upward prices on homes and an acceleration of the pace of home sales.
Spending on food and at eating and drinking establishments was also up compared to a year ago.
The report showed that consumers are finally spending their gas savings. Income that would ordinarily be spent commuting to work and heating homes is instead being spent at eating and drinking establishments, as indicated by the 6.1 percent bump food services and drinking places have seen in sales compared to January 2015.
“People are feeling more comfortable going out to eat now that their car isn’t taking all of their disposable income,” said Simons.
Low gas prices also lead to a 0.6 percent bump in auto sales, which contributed to overall growth in January compared to December.
“For as much as people talk about how consumers aren’t spending all their savings from gasoline prices, one thing they are doing is buying a truck rather than a Prius or fuel efficient vehicle. Trucks tend to be more expensive, so that boosts retail sales a little bit,” Simons said.
Some economists doubt the strong gains will continue, and are predicting that sales could be down next month, due to a snowstorm in the northeast and colder temperatures across the country.
“February has been quite a bit colder than January and that usually keeps people out of stores. On the other hand apparel retailers are complaining that winter sales coats are down because December and January were so warm so maybe this will get people out of the house to go buy ski parkas,” said Simons.
Overall, the report represents a strong start to the quarter.