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Macro Market Update

Authors: Jerusan Jegatheeswaran Co-VP Research, Dragos Cada Co-VP Research, Alice Li Research Analyst, Amy Li Research Analyst, Helen Feng Research Analyst

Retail Sales Declined at Fastest Pace Since 2009 in December

U.S. retail sales recorded their biggest drop in more than 9 years as receipts fell across the board, suggesting a sharp slowdown in economic activity at the end of 2018. Retail sales, a measure of purchases at stores, restaurants and online, tumbled 1.2% in December from a month earlier to $505.8 billion, the largest decline since September 2009 when the economy was emerging from recession.

Economists polled by Reuters had forecast retail sales to increase by 0.2% in December. However, excluding automobiles, gasoline, building materials and food services, retail sales dropped 1.7% last month after a slightly upwardly revised 1.0% surge in November. These core retail sales correspond with the consumer spending component of gross domestic product. Last year, they were reported to have jumped 0.9% in November.

Source: U.S. Commerce Department

Consumer Spending

December's sharp drop in retail sales indicated a moderation in the pace of consumer spending in the fourth quarter. Consumer spending, which accounts for more than two-thirds of the U.S. economy, increased at a 3.5% annualized rate in the July-September quarter.

In December, online and mail-order retail sales dropped 3.9%, the biggest drop since November 2008, after increasing 2.8% in November. Receipts at service stations decreased 5.1%, the biggest fall since February 2016, with part of the reason being cheaper gasoline prices. Gas prices for U.S. drivers were $2.37 a gallon on average in December, down from $2.65 in November. Sales at nonstore retailers, a category that includes e-commerce unicorns such as Amazon.com, were down 3.9% compared with a month earlier, the biggest decline since November 2008. Restaurant sales also dropped 0.7% from a month earlier.

Source: U.S. Commerce Department

US Equities Reaction to Retail Sales Report

The stock market reacted quickly to the release of much weaker-than-expected retail sales data. The S&P 500 dipped 0.27% to 2,745.72 as the consumer staples and financials sectors lagged. The Dow pulled back 103.88 points to 25,439.39 as shares of Coca-Cola had their worst day since 2008. The Nasdaq Composite, unexpectedly, closed with a gain of 0.1% to 7,426.95 as Netflix's stock climbed more than 2%.It is clear that the steep drop in retail spending in the world’s largest economy heightened investor fears of a global slowdown. Furthermore, data released on Thursday reflects an unexpected increase in the number of Americans filing claims for unemployment benefits last week. That pushed the four-week moving average of claims to a one-year high, a signal indicating that job growth was flattening. Nonetheless, while some interpreted the weak sales data as a sign that U.S. economic growth is beginning to cool off, others hope that the tumble was temporary and reflected that many holiday sales were pulled into November.

The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.