US Macro: Retail sales surge in January – US retail sales unexpectedly surged 5.3% m/m in January, with total retail sales now 7.8% above the pre-pandemic levels of last February. The strength reflects a continued trend of strong growth in goods consumption more than offsetting the weakness in hospitality (although that weakness has ebbed somewhat; see table below). Consumers have surprised over the past year in their ability to substitute away from consumption of services to goods, and while restaurants have now re-opened across the US, hospitality continues to be a significant drag on retail sales. More than offsetting this has been a jump in durable goods purchases, with online sales, autos and home improvement doing particularly well. This raises a key question for the outlook going forward: if goods consumption is exceptionally strong right now, will this continue once the services economy fully re-opens? Or might we then see a drag from goods consumption once preferences shift back to spending in the hospitality sector?
Retail sales vs pre-pandemic (February) levels: Strength in goods has offset weakness in hospitality in recent months
Source: Refinitiv Datastream, ABN AMRO Group Economics
Catch up consumption vs bringing forward future demand – The answer to this question is complex, because there is a significant variation in how much goods consumption represents ‘catch up’ from the shortfalls at the beginning of the pandemic, and how much of it represents ‘bringing forward’ demand from the future. In order to check this, we compared total retail sales over the past year in each category to what would be expected in a ‘normal’ year, such as 2019. We find that home improvement goods sales (which make up 6.2% of total retail sales) have grown almost 15% over the past year, whereas in 2019 this category grew by just 0.8%. We would definitely view consumption here as bringing forward future demand, and as such, demand is likely to fall away again as the hospitality sector reopens. However, for autos (which make up 19.9% of total retail sales), it is a different story. While autos sales have been around 10% higher than pre-pandemic levels over the past few months, this strength still appears to be making up for weakness seen during the first wave of the pandemic, when sales were very depressed. In total, auto sales have grown only 1.6% over the past year, compared to 2019 growth of 3.7%. As such, and in contrast to home improvement, auto sales still seem very much in a catch-up phase, and we are therefore likely to see strength in this category persist even after the economy has fully reopened.
Conclusion: Retail sales likely to remain strong – While it is likely we will see payback in some goods categories that have performed well over the past year, this will probably be offset by continued strength in others. At the same time, a recovery in hospitality and other retail sales categories that remain depressed – such as clothing – suggests overall sales will continue to grow at a solid clip over the coming year. This will be supported by significant savings buffers on the part of households, and the passage of the $1.9trn fiscal support package currently making its way through Congress. This will bring another round of stimulus checks, alongside an extension to unemployment benefit top-ups. For more on prospects for the US economy this year, see our 2021 Outlook, published last week. (Bill Diviney)