U.S. retail sales declined by 1.9%

December U.S. retail sales declined by 1.9% m/m, sharply missing market expectations. KPMG Senior Economist Ken Kim discusses his three takeaways from the December report.

Kenneth Kim

Kenneth Kim

Senior Economist, KPMG US

+1 212-954-6144

Video transcript

KPMG Senior Economist Ken Kim discusses his three takeaways from the December retail sales report.

Perfect storm:  Multiple negative factors push December retail sales down

The final month of 2021 proved to be as unpredictable as the first 11 for retailers. Rising COVID cases, limited inventory and decades-high inflation combined to create a perfect storm for a retail downtick, with sales dropping 1.9 percent month-over-month. 

The sharp drop reported in the latest Commerce Department data was widespread among many categories, and considerably more than the .1 percent drop economists expected in December.

Retailers struggle with supply chain disruption

Lack of inventory was a key factor in the significant decline in sales activity. Online sales sunk nearly 9 percent and were responsible for more than half of December’s total decline. Many retail companies have publicly blamed inventory issues for missed holiday sales targets.

Between shipping delays, employment shortages and product scarcity, the global supply chain crunch has also driven prices higher, causing consumers to curb spending and impacting sales of discretionary items. 

COVID continues to dictate economic outcomes

The shortfall in December retail sales also shows the persistent impact of the pandemic on buying activity. As Omicron cases surged, consumer spending waned across the board.

Most significantly, the spread of the variant pared back many holiday season activities and gatherings, resulting in a .8 percent drop in sales at restaurants and bars.

Annual picture for retail remains positive

Although the severity of December’s decline was a surprise, economists had expected some slowing, largely due to early holiday shopping momentum. Consumers, who had been warned of shipping delays and inventory problems, planned ahead and picked up holiday purchases sooner in the season, propelling solid retail sales in October and November.

Shipping delays may have cost firms some of their holiday sales, and goods that did not arrive in time may be discounted now that the holidays have passed.

As a result, we’ve lowered our forecast for Q4 GDP, but still expect a solid 5.5 percent on a seasonally adjusted annualized basis. 

December sales drop is likely temporary

December’s decline in retail sales can be chalked up to a perfect storm of conditions: rising COVID cases, limited inventory, and higher prices.  The good news is that there are early signals that new cases of Omicron are beginning to dissipate.  Coupled with the possibility of discounted goods prices, this should lead to better consumption outcomes in Q1 2022.