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WASHINGTON (Reuters)

US retail sales increased in December as households bought motor vehicles and a range of other goods, pointing to strong demand in the economy and further reinforcing the Federal Reserve’s cautious approach to cutting interest rates this year.

The report from the Commerce Department on Thursday (January 16) prompted economists to upgrade their economic growth estimates for the fourth quarter to just shy of the July-September quarter’s brisk pace.

It followed news last week of a surge in nonfarm payrolls in December and a drop in the unemployment rate to 4.1 from 4.2 per cent in November. Though underlying inflation slowed last month, overall consumer prices increased by the most in nine months. Labour market strength is driving spending through higher wage growth.

“No one can make a case that the Fed has any urgent need to cut interest rates from this retail sales report,” said Carl Weinberg, chief economist at High Frequency Economics. “No push from monetary stimulus is needed with the economy already at full employment.”

Retail sales rose 0.4 per cent last month after an upwardly revised 0.8 per cent gain in November, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.6 per cent after a previously reported 0.7 per cent rise in November. Retail sales increased 3.9 per cent year-on-year in December.

Sales at auto dealerships rose 0.7 per cent after accelerating 3.1 per cent in November. Receipts at furniture stores shot up 2.3 per cent while those at clothing retailers rebounded. Sporting goods, hobby, musical instrument and bookstore sales jumped 2.6 per cent.

Receipts at miscellaneous store retailers soared 4.3 per cent. Online store sales rose only 0.2 per cent. But receipts at food services and drinking places, the only services component in the report, fell 0.3 per cent after edging up 0.1 per cent in November. Economists view dining out as a key indicator of household finances. Freezing temperatures could have kept consumers at home.

US stocks opened higher. The dollar rose against a basket of currencies. US Treasury yields were higher.

STRONG CORE SALES

Retail sales excluding automobiles, gasoline, building materials and food services surged 0.7 per cent last month after an unrevised 0.4 per cent gain in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Economists estimated that consumer spending grew at a 3.3 per cent annualised rate in the fourth quarter after accelerating at a 3.7 per cent pace in the July-September quarter. Capital Economics raised its GDP growth forecast for the last quarter to a 2.9 per cent rate from a 2.7 per cent pace earlier.

The economy grew at a 3.1 per cent pace in the July-September quarter, well above the 1.8 per cent pace that U.S. central bank officials regard as the non-inflationary growth rate.

The Fed has forecast only two rate cuts this year, down from the four it had projected in September, when it launched its policy easing cycle. That was in acknowledgement of the potential risks from President-elect Donald Trump’s plans for broad tariffs, mass deportations of undocumented immigrants and tax cuts, which economists have warned are inflationary.

The Fed is not expected to cut rates this month. Its benchmark overnight interest rate has been reduced by 100 basis points to the 4.25%-4.50% range, having been hiked by 5.25 percentage points in 2022 and 2023.

A separate report from the Labor Department showed initial claims for state unemployment benefits rose 14,000 to a seasonally adjusted 217,000 for the week ended Jan. 11. Economists had forecast 210,000 claims for the latest week.

Claims data tend to be volatile at the start of the year but have continued to signal low layoffs. Claims last week were likely boosted by wildfires in California. Unadjusted claims in California vaulted 13,074 last week.

The Fed’s Beige Book report on Wednesday described employment as having “ticked up on balance” in early January. It said “contacts across multiple sectors noted difficulty finding skilled workers, and reports of layoffs remained rare,” but added “contacts in some districts expressed greater uncertainty about their future staffing needs.”

The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 18,000 to a seasonally adjusted 1.859 million during the week ending January 4, the claims report showed.