U.S. Retail Spending, Manufacturing Drop as Omicron and Inflation Surge

By guest author Gabriel T.Rubin from the Wall Street Journal. Suzanne Kapner contributed to this article.

U.S. retail spending and manufacturing slowed at the end of 2021 as the Covid-19 Omicron variant and inflation surged, early signs the latest complications from the pandemic could be weighing on the economy.

Sales at retail stores, online and restaurants dropped by 1.9%, damping the end of the holiday shopping season, the Commerce Department said on Friday. December’s sharp decline followed record-level retail sales that started with a 1.8% gain in October from the prior month.

Sales were up considerably over the past year, however. Retail sales grew 16.9% in December when compared with the same month a year ago, marking a resurgent period for consumer spending after a fuller reopening of the economy as vaccinations spread and government stimulus that left households flush with savings.

The Federal Reserve separately said U.S. industrial production fell for the first time since September. Manufacturing output, a key component of the reading, dropped 0.3% as supply-chain issues continue to affect output.

U.S. stocks had a mixed showing after the release of the weaker-than-expected economic figures and bank earnings reports showing smaller profits, with the Dow Jones Industrial Average falling and the S&P 500 and Nasdaq showing slight gains.

Many holiday shoppers heeded warnings about shipping delays, pushing a large share of the season’s usual gains earlier in the year. Sales were down broadly across spending categories in December, with online sales dropping sharply by 8.7%.

Electronics stores declined by 2.9% over the previous month in December, while furniture and home stores dropped by 5.5%. Restaurant and bar sales dropped by 0.8%.

“The overall numbers are terrible, but the details are all over the map,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We expect a strong rebound in sales once the Omicron wave subsides.”

For now, consumers’ opinions of the economy are worsening. The University of Michigan’s consumer sentiment survey showed a drop on Friday, and expectations for inflation over the next five years rose to 3.1 %, up from the 2.9 % increase reported in December.

Economists say effects of the pandemic—which is nearing two years—such as limited supplies and the wave in inflation is causing Americans to pause purchasing.

Retail sales are adjusted for seasonal variations, but aren’t adjusted for inflation, so the increases of the past year are damped by historically high inflation. The consumer-price index, a primary measurement of inflation, rose to 7% in December from a year ago, the highest level since 1982.

The robust annual growth in 2021, despite the December decline, is a reflection of the torrent of consumer spending that has followed in the wake of depressed sales the prior year during the worst economic period of the Covid-19 pandemic. Retail businesses aren’t likely to see the same pace of growth this year, economists say. Consumer savings has come down from high levels, and the Omicron variant is creating fresh disruptions and keeping patrons away from restaurants and bars.

“In any normal year you don’t see sales go up by this much,” said Neil Saunders, managing director of GlobalData Retail, referring to 2021’s performance.

Because of a supply-chain crunch, some retailers might end up with extra products that they had hoped to sell over the holidays but didn’t receive in time, resulting in discounting, according to economists. Another factor is expected additional shifts in spending from goods to services once the pandemic finally eases. During the pandemic, consumers have spent more on goods while services spending has remained below pre-pandemic levels. In November, before the Omicron surge in the U.S., the balance had begun to shift back toward services, with goods spending rising 0.1 % while services spending climbed 0.9 %.

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Several large retailers said this week that the Omicron surge and supply-chain disruptions crimped holiday sales. Lululemon Athletica Inc. and Abercrombie & Fitch Co. said their sales would be dented by the disruptions.

Lululemon Chief Executive Calvin McDonald said that the company started the holiday season in a strong position but that the Covid-19 surge limited staff availability, prompting the chain to reduce store hours in some places. Abercrombie Chief Executive Fran Horowitz said an unexpected shortfall of inventory in key categories because of port and transportation delays hurt sales.

“If we had the inventory on hand, we could have delivered sales within our previous range,” Ms. Horowitz said.

Auto sales dropped by 0.7%, which may have more to do with limited inventories at dealerships caused by supply chain disruptions and semiconductor shortages.

“Supply is so short and so much less than it typically is that it’s hard to see the backlog of demand behind the people who are buying the few cars we have,” said Adam Kraushaar, president of Lester Glenn Auto Group in New Jersey.

For Paula Humphrey, general manager of Don’s Garden Shop in Colorado Springs, Colo., supply-chain problems have been both a boon and a challenge. She said sales at the garden center have been “over the top” since the pandemic began, with many customers citing the desire to grow their own food to sidestep grocery shortages and inflated prices.

Shipping delays have caused her business, which her husband, Don Humphrey, founded more than four decades ago, to adapt. They have had difficulty procuring manufactured garden materials, such as flagstones and fountains, because of high demand and because their supplier of flagstones hasn’t been able to employ guest workers from Mexico, as it usually does.

“This year we’re getting inventory in just so we’ll have it,” Ms. Humphrey said. “Usually we would never order flagstones in January.”

Restaurants and bars have struggled to deal with the double whammy of depressed services spending and high inflation.

www.wsj.com