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Retail Sales Reflect the New Spending Reality

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Last year saw the biggest drop in sales in 27 years.

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You're just not shopping like economists thought you would.

This morning, the Commerce Department released disappointing data on December 2009 retail sales. Uncle Sam said sales fell 0.3% in December versus November, weaker than the 0.5% jump that economists had predicted.

Excluding autos, sales sunk by 0.2%, undershooting the 0.3% rise the Street had expected.

For the year, sales nosedived 6.2%.That, according to the AP, marks the biggest decline on government records that go back to 1992.

The 0.3% decline in December was the first setback since September, when sales had tumbled 2%. Sales posted gains of 1.2% in October and 1.8% in November.

Separately, the Labor Department reported that new claims for unemployment insurance increased by 11,000 to a seasonally adjusted 444,000. Economists had expected an increase of 3,000.

For reaction to the report, we called up David Wyss, the chief economist at Standard & Poor's.

"This was a lot worse than we expected," Wyss says. "We thought things had been better than that. It is somewhat ameliorated by the upward revision to November. That caused a bit of an offset. It means the holiday season got off to a better start but a worse finish than we expected."

Looking ahead, Wyss is looking for retail sales to grow at a subpar 2% in 2010.

"That is better than last year, but it's rising at a mediocre pace," he says. "The consumer is becoming more cautious about spending and borrowing. And banks are more cautious about lending."

There are economists and strategists who argue that there's been a secular, fundamental shift in how Americans now think about discretionary spending, credit, and homeownership.

Just as the Great Depression caused our parents and grandparents to reconsider their views on saving and spending, so this recent historic downturn, some economists think, will realign our own priorities about how we think about burning through those hard-earned dollars.

"Nothing is permanent in life but we did go through a period in the last decade when we lived beyond our means," says Wyss. "Now we will go back to a more balanced pattern. The savings rate will be higher as people become more cautious about borrowing. This is a long term, secular shift."

Certainly, the consumer continues to struggle against powerful headwinds as we drive into 2010 including one really lousy labor market: a 10% unemployment rate and a 17.3% underemployment rate.

Gluskin Sheff's David Rosenberg rounds out the other speed-bumps that are now potentially tripping up our spending habits.

Gasoline prices have surged $1 a gallon from a year ago and stand at a 15-month high of over $2.70 a gallon. Every penny increase at the gas pumps drains the equivalent of $1.3 billion from household cash flow, Rosenberg reminds us.

The strategist also points out that mortgage rates in the US are up a quarter-point in the past month and are at a four-month high.

What about home prices? Worth noting, says the Toronto-based bear, that with at least two years' supply of homes in the market, US home prices, on average, still have 10-15% downside before fully mean reverting.

This morning, as we write, the SPDR Retail ETF (XRT), with holdings such as Amazon (AMZN), Petsmart (PETM), Walgreen (WAG), and Whole Foods (WFMI), is down about 0.8%.

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No positions in stocks mentioned.
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