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U.S. Retail Spending, Lower Manufacturing Driven by Omicron and Soaring Inflation

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U.S. retail spending and manufacturing slowed in late 2021 as the Covid-19 Omicron variant and inflation surged, early signs that the latest complications from the pandemic could weigh on the economy.

Sales at retail stores, online and in restaurants fell 1.9%, dampening the end of the holiday shopping season, the Commerce Department said Friday. December’s sharp decline followed record high retail sales which began with a 1.8% gain in October from the previous month.

However, sales have increased significantly over the past year. Retail sales rose 16.9% in December from the same month a year ago, marking a period of upswing in consumer spending after the economy reopened more fully as vaccinations spread and that government stimulus measures have left households teeming with savings.

The Federal Reserve said separately that US industrial production fell for the first time since September. Manufacturing output, a key part of the reading, fell 0.3% as supply chain issues continue to affect output.

U.S. stocks posted mixed performance after weaker-than-expected economic numbers came out and bank earnings reports showed weaker earnings, with the Dow Jones Industrial Average falling and the S&P 500 and Nasdaq posting small gains.

Many holiday shoppers heeded warnings about shipping delays, pushing back much of the usual gains from seasons earlier in the year. Sales fell across all spending categories overall in December, with online sales falling sharply by 8.7%.

Electronics stores fell 2.9% from the previous month in December, while furniture and home stores fell 5.5%. Restaurant and bar sales fell 0.8%.

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The headline numbers are terrible, but the details are everywhere, said Ian Shepherdson, chief economist at Pantheon Macroeconomics. We expect a strong rebound in sales once the Omicron wave passes.

For now, consumer sentiment on the economy is deteriorating. The University of Michigan consumer sentiment survey showed a decline on Friday and inflation expectations over the next five years rose to 3.1% from 2.9% in December.

Economists say the effects of the pandemic approaching two years, such as tight supplies and the wave of inflation, are pushing Americans to pause shopping.

Retail sales are seasonally adjusted, but not inflation adjusted, so increases over the past year are cushioned by historically high inflation. The consumer price index, a main measure of inflation, rose to 7% in December from a year ago, the highest level since 1982.

The robust annual growth in 2021, despite the decline in December, reflects the torrent of consumer spending that followed following the previous year’s sales decline during the worst economic period of the Covid-19 pandemic. Retail businesses are unlikely to experience the same pace of growth this year, economists say. Consumer savings have fallen from high levels, and the Omicron variant is creating further disruption and driving customers away from restaurants and bars.

In a normal year, you don’t see sales increase that much, said Neil Saunders, managing director of GlobalData Retail, referring to 2021 performance.

Due to a supply chain crisis, some retailers could end up with extra products they hoped to sell over the holidays but did not receive in time, resulting in discounts, according to the economists. Another factor is expected further shifts in spending from goods to services once the pandemic finally subsides. During the pandemic, consumers spent more on goods while spending on services remained below pre-pandemic levels. In November, before Omicron’s US push, the balance had started to shift back towards services, with spending on goods rising 0.1% while spending on services rose 0.9%.

During a confirmation hearing for his second term as Federal Reserve Chairman, Jerome Powell said the central bank would use its tools to rein in inflation. Photo: Graeme Jennings/Press Pool

Several major retailers said this week that the Omicron surge and supply chain disruptions weighed on holiday sales. Lululemon Athletica Inc. and Abercrombie & Fitch Co. said their sales would be affected by the disruptions.

Lululemon chief executive Calvin McDonald said the company started the holiday season in a strong position but the Covid-19 surge had limited staff availability, prompting the chain to reduce opening hours shops in some places. Abercrombie chief executive Fran Horowitz said an unexpected lack of inventory in key categories due to port and transport delays hurt sales.

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

Auto sales fell 0.7%, which may have more to do with limited inventory at dealerships due to supply chain disruptions and semiconductor shortages.

The supply is so short and so lower than it usually is that it’s hard to see the backlog of demand behind people buying the few cars we have, said Adam Kraushaar, president of Lester Glenn Auto Group in New Jersey.

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For Paula Humphrey, general manager of Dons Garden Shop in Colorado Springs, Colorado, supply chain issues have been both a boon and a challenge. She said sales at the garden center have been at the top since the start of the pandemic, with many customers citing a desire to grow their own food to avoid grocery shortages and inflated prices.

Delivery delays have forced her business, which her husband, Don Humphrey, founded more than four decades ago, to adapt. They had difficulty sourcing manufactured garden materials, such as flagstones and fountains, due to high demand and because their flagstone supplier was unable to employ guest workers from Mexico. , as it usually does.

This year the inventory was so good, Ms. Humphrey said. Usually we would never order slabs in January.

Restaurants and bars have struggled to cope with the double whammy of falling service spending and high inflation.

John Lincecum, co-founder of Turtle Swamp Brewing in Boston, says the pandemic has hurt his cash flow. Photo: Brandon Johnson

My cost of cans and cereal went up, so I passed it on to the consumer, said John Lincecum, co-founder of Turtle Swamp Brewing, a brewery and tavern in Boston’s Jamaica Plain neighborhood.

Lincecum, who holds a doctorate in biochemistry and has years of experience applying for government research grants during his earlier career as an amyotrophic lateral sclerosis researcher, has kept the brewery open for the early stages of the pandemic with the help of loans from the Small Business Administration. and grants.

While distribution deals with grocers, including Whole Foods Market as well as Massachusetts restaurants and bars, have helped grow his wholesale business, he said he relies on cash flow from the dining room to eat to pay regular business expenses.

The ability to have that weekly and monthly cash flow to pay for utilities and bi-weekly payroll was gone, he said, as customers avoided eating and drinking in person due to rising cases. of Covid-19.

Turtle Swamp recently instituted a vaccination mandate for customers, two weeks ahead of Boston’s citywide mandate, but said customers likely won’t return in large numbers until the current surge. case calms down a bit and the weather improves.

The next six months will decide there will be a wave of bankruptcies, Lincecum said. The little guys can’t keep it.

Write to Gabriel T. Rubin at [email protected]

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