Economic Optimism Soars as Retail Sales Climb
The latest retail sales figures have sent a strong signal that the US economy is thriving, with December’s numbers exceeding expectations. According to the Commerce Department’s Census Bureau, retail sales rose 0.4% last month, building on an upwardly revised 0.8% gain in November.
Consumer Confidence Boosts Spending
The robust performance is attributed to solid demand and labor market resilience, which is driving spending through solid wage growth. Additionally, household balance sheets are in good shape, although lower-income consumers are struggling to keep up. The report follows a surge in nonfarm payrolls and a drop in the unemployment rate to 4.1% from 4.2% in November.
Inflation Concerns Linger
While underlying inflation slowed in December, overall consumer prices increased by the most in nine months. This has led the Federal Reserve to adopt a cautious approach to cutting interest rates this year, with only two rate cuts forecasted, down from the four projected in September.
Fed’s Policy Easing Cycle
The central bank launched its policy easing cycle in September, acknowledging the potential risks from President-elect Donald Trump’s plans for broad tariffs, mass deportations of undocumented immigrants, and tax cuts, which economists have warned are inflationary. The Fed’s benchmark overnight interest rate has been reduced by 100 basis points to the 4.25%-4.50% range, having been hiked by 5.25 percentage points in 2022 and 2023.
Core Retail Sales Surge
Retail sales excluding automobiles, gasoline, building materials, and food services surged 0.7% last month after an unrevised 0.4% gain in November. These core retail sales correspond most closely with the consumer spending component of gross domestic product. The Atlanta Fed is currently forecasting GDP increasing at a 2.7% annualized rate in the fourth quarter, following a 3.1% pace in the July-September quarter.
GDP Growth Exceeds Expectations
The economy grew at a 3.1% pace in the July-September quarter, well above the 1.8% pace that Fed officials regard as the non-inflationary growth rate. As the economy continues to thrive, the Fed is not expected to cut rates this month, opting instead to monitor the situation closely.
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