Strong Retail Sales Signal Robust Economy
The US economy is ending the year on a high note, with retail sales surging more than expected in November. According to the Commerce Department, households increased their purchases of motor vehicles and online merchandise, indicating strong underlying momentum.
Fed Rate Cut Expectations Unchanged
Despite the positive retail sales report, expectations for a Federal Reserve interest rate cut on Wednesday remain unchanged. The Fed’s policy meeting began on Tuesday, and officials are likely to consider the strong domestic demand and warmer inflation readings in their decision-making process.
Consumer Spending Drives Growth
Labor market resilience, characterized by historically low layoffs and strong wage growth, is supporting consumer spending. Additionally, strong household balance sheets, driven by record stock market prices and high home prices, are also driving spending. Household savings remain supportive, and economists expect policymakers to signal fewer rate cuts in 2025.
Retail Sales Jump 0.7%
Retail sales increased 0.7% in November, surpassing economists’ forecasts of a 0.5% gain. This marks a 3.8% year-over-year increase. Sales at auto dealerships jumped 2.6%, while online retail sales vaulted 1.8%. Receipts at sporting goods, hobby, musical instrument, and book stores increased 0.9%.
Tariffs and Immigration Policies Pose Challenges
However, policies planned by the incoming administration, including tariffs on imports and mass deportations of undocumented immigrants, are expected to complicate matters for the central bank. Economists warn that these policies could lead to slower economic growth and higher inflation.
Manufacturing Remains Downbeat
While consumers are driving the economy, manufacturing remains downbeat due to the lingering effects of the Fed’s policy tightening and the crippling strike by factory workers at Boeing. Factory output increased 0.2% in November, but economists expect tariffs to pose a significant challenge to the sector next year.
Economists’ Outlook
Economists expect consumer spending to continue driving the economy, but at a slower pace as the year progresses. They warn that consumers are becoming more vulnerable due to slowing real income growth and high financing costs. The Atlanta Fed forecasts GDP increasing at a 3.1% pace in the fourth quarter, while economists estimate consumer spending will grow at around a 3.0% pace so far in the quarter.
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