Retail sales beat expectations

Auto sales have been unusually volatile in the past several months, and they dropped 7% in December. If we exclude them from today's December retail sales release, sales were much stronger than expected (+0.7% vs. +0.4%). If we exclude the other volatile components (building materials and gas stations), sales also beat expectations (+0.7% vs. +0.3%). If, as Brian Wesbury notes, we consider the headwinds that buffeted the economy last year (e.g., the budget sequester, debt limit debate, partial federal shutdown, tapering, and higher long-term interest rates) retail sales by any measure were fairly impressive, increasing about 4% for the year.

On an inflation adjusted basis, retail sales ex-autos rose about 2.5% last year, with no sign of any emerging weakness or slowdown. (see chart above) Sales are comfortably above their pre-recession highs.

The non-volatile components of retail sales are increasing at almost the same pace that has prevailed for decades. As the chart above shows, the retail sales "control group" increased 4.3% last year, and rose at an annualized pace of 5.5% in the second half of last year.

Despite the huge decline in the labor force participation rate, which has effectively removed some 10 million from the workforce, the economy continues to expand. It could be doing a lot better (e.g., the blue line in the above chart could be tracking the green trend line) if all those people could be enticed back into the labor force and were able to find jobs, but nevertheless the economy continues to expand at a fairly normal pace, which I would argue is somewhat better than the market has been expecting.