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Growth outlook weakens as a result of disappointing retail data

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A last-minute shopper scans his mobile device next to a sign marking discounts on coats at Columbia store as shoppers finish up their Christmas gift lists at the Outlet Malls in Castle Rock in Castle Rock, Colo.
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Bloomberg
Jerome Powell, chairman of the Federal Reserve, speaks during an Economic Club of Washington D.C., on Jan. 10, 2019. MUST CREDIT: Bloomberg photo by Al Drago

The surprising plunge in U.S. retail sales undermined the outlook for economic growth and is likely to leave the already-cautious Federal Reserve in an extended holding pattern.

A government report out Thursday — delayed four weeks because of the partial federal shutdown — showed retail sales fell in December from the prior month by the most in nine years, a potential warning signal since consumer spending comprises the bulk of the economy. Stocks sank and Treasuries gained as the reading missed all projections, spurring analysts to slash tracking estimates for fourth-quarter growth.

While the retail numbers are subject to revisions and some researchers questioned their validity given other reports showing an upbeat holiday shopping season, the report at least reinforces the Fed’s January decision to be patient on adjusting interest rates following four increases in 2018. Investors expect the central bank to be on hold throughout 2019, according to pricing in fed funds futures.

“It certainly caught my eye,” Fed Governor Lael Brainard said Thursday in a CNBC interview when asked about the retail figures. “It’s one month of data, so I don’t want to take too much signal from it,” she said. “It certainly adds to a story where we want to take on board that there are some downside risks.”

The numbers may reflect consumer worries in December including a government shutdown, the month’s biggest stock-market plunge since the 1930s and the trade tensions with China. They also contrast with retail strength in prior months, along with other economic data such as employment and wage growth that suggest consumers have the means to spend.

“The numbers on their face are not good numbers and could fuel expectations that the economy is losing momentum,” said Michael Gapen, chief U.S. economist at Barclays. “But they stand in contrast to a lot of other indicators that show the economy is healthy — including the labor market, growth of employment. We expect things to rebound, but to a slower pace on average.”

The cuts were relatively steep in tracking projections for the annualized pace of gross domestic product gains in the fourth quarter. The Atlanta Fed’s GDPNow estimate fell to 1.5 percent from 2.7 percent, Barclays shaved its projection to 2.1 percent from 2.8 percent, while JPMorgan Chase & Co. chopped its down to 2 percent from 2.6 percent.

The Commerce Department will release its first report on fourth-quarter GDP on Feb. 28, delayed almost a month by the shutdown.

The retail figures suggest consumer spending could be losing more momentum than expected in the first quarter, when analysts were already forecasting a slowdown as the effects of Republican tax cuts wear off.

Bank of America Corp. research based on credit- and debit-card use by the company’s customers showed Americans’ spending at retail outlets is on the weakest trajectory in more than two years after unusually cold weather dented sales in January.

The retail sales data showed drops across discretionary spending while auto sales and building materials rose, indicating some confidence to make larger purchases.

Roberto Perli, a partner at Cornerstone Macro in Washington and a former Fed economist, pointed to several headwinds in December that may not be repeated. “It’s just one month, and the Fed is never swayed by one month of data —most of the times wisely,” he said.

Even so, the retail data made it tougher to see the chance that the economy would stay strong enough for the Fed to hike again later this year.

“This is really a consumer-led recovery,” said Omair Sharif, senior U.S. economist at Societe Generale. “If the consumer starts to falter, that’s almost certainly going to cause the Fed to be much more patient.”

Loretta Mester, president of the Cleveland Fed and one of the policymakers who’s still been talking up the possibility of a 2019 rate increase, said in a speech Tuesday she’d be paying close attention to consumer confidence.

“We will need to keep a close eye on whether household sentiment weakens so much that people postpone spending or whether they remain cautiously optimistic and continue to spend,” Mester said.