Dive Brief:

• U.S. retail sales rose 0.6% last month compared with November, exceeding forecasts and highlighting the prospect that robust consumer outlays will spur economic growth early in 2024.
• Retail spending increased more than during any month since September, the Commerce Department said Wednesday, with motor vehicles, clothing and e-commerce purchases fueling much of the gains.
• “Those that doubt the resilience of the American household keep losing,” RSM Chief Economist Joseph Brusuelas said on X, formerly known as Twitter. Higher-than-projected spending argues against predictions by investors and analysts that the Federal Reserve will begin trimming borrowing costs as early as March, he said, forecasting that the central bank will not cut the federal funds rate until June.

Dive Insight:

Economists predicting a recession this year point to several headwinds to retail and other consumer spending, including declining savings, slower wage growth, a cooling job market, the highest federal funds rate in 22 years and persistent inflation above the Fed’s 2% target.

“Factors such as high interest rates, a depletion of excess savings and a pickup in credit card usage all portend slower growth ahead, but it is unclear how much of that slowing has already occurred,” Fed Governor Christopher Waller said in a speech Tuesday.

“Since consumer spending accounts for more than two-thirds of GDP, this component of demand is obviously critical for the outlook,” he said.

Companies in many of the Fed’s 12 districts expect wage growth to slow this year, according to a central bank report released Wednesday.

Also, “nearly all districts cited one or more signs of a cooling labor market, such as larger applicant pools, lower turnover rates, more selective hiring by firms and easing wage pressures,” according to the Fed report, known as the Beige Book.

Still, such constraints did not inhibit consumer spending last month, the central bank said, citing reports compiled through January 8.

“Consumers delivered some seasonal relief over the holidays by meeting expectations in most districts and by exceeding expectations in three districts, including in New York,” according to the report released by the Fed two weeks before officials meet to discuss monetary policy.

At the same time, a survey by the New York Fed reinforced predictions that consumer spending will flag this year by signaling “a continuation of the recent declining trend in monthly household spending growth.”

Household expectations last month for overall spending growth in the year ahead fell to the lowest level in three years, while still exceeding pre-pandemic levels, the New York Fed said Tuesday, describing its survey of consumer expectations and household spending.

Three out of five households (59.7%) last month reported making at least one large purchase during the past four months compared with 63.5% in August, the New York Fed said.

The Commerce Department’s retail spending data focus primarily on purchases of goods and do not encompass all categories of consumer spending.