Don't call it a spending spree

INDICATOR: December Retail Sales and Import Prices

KEY DATA: Sales: +0.2%; Excluding Vehicles: +0.7%/Import Prices: 0.0%; Non-Fuel: -0.1%

IN A NUTSHELL: "Consumers spent at a decent pace in December but don't start thinking a spending spree is here or even coming soon."

WHAT IT MEANS: The tales of woe coming out of the major retailers were loud and long. Were they crying wolf? Maybe not, as the stronger than expected retail sales numbers have lots of holes in them. First, look at where sales rose solidly. The rising gasoline purchases were likely hyped, at least in part, by increasing prices. Grocery store demand skyrocketed. Can anyone think of a reason other than people bought lots of provisions to survive the lousy weather? This was only the third time in the last 264 months (22 years) that the monthly increase was 2% or more. It's nonsensical. Sales at clothing stores jumped. I guess warm clothes were in, but that is hardly sustainable. The one place where a large rise was logical was online purchases. If you cannot get out, shopping at home makes lots of sense. On the negative side, there were significant cutbacks in spending on all big-ticket items, including vehicles, furniture, appliances and electronics. That is worrisome. Sales of sporting goods and building supplies also fell. And finally, department store demand dropped, which is why the large retailers sang their songs of woe.

In a separate release, The Bureau of Labor Statistics reported that import prices were basically flat in December with energy and food the major places where costs rose. Consumer and capital goods prices eased while vehicle import prices were flat. In other words, inflationary pressures coming from imported goods are minimal. On the export side, farmers managed to push through some increases, but over the year, their export prices are down over six percent.

MARKETS AND FED POLICY IMPLICATIONS: Most economists, including myself, expected retail sales to be down because vehicle purchases had fallen sharply in December. Excluding vehicles, the increase was greater than predicted. Thus, this report looks pretty good. Nevertheless, the state of the consumer is not that great. Retail sales rose only 4.2% in all of 2013 compared to a 5.4% rise in 2012. Last year's increase was powered by a nearly ten percent jump in vehicles demand. That is great, but not likely to be duplicated. Excluding vehicles, retail sales rose a puny 3.2%. Here comes the dead horse: Without stronger increases in incomes, consumer demand will not accelerate. That is why I keep focusing on the unemployment rate. If it really is coming down as fast as the government claims, and I think it is, wages gains will improve as we go through the year. Thus, I am optimistic about retail sales, but more so for the second half of the year than the first. Regardless, investors will probably like this report as it eases the unwarranted fears created by the soft December employment report. As for Fed members, they understand that this is a process and right now, they are probably more focused on where the labor market will be in six to twelve months than what December retail sales looked like.