Warning sign for the economy: Consumers are getting grumpy

Consumers are getting grumpy about inflation, Omicron and a host of other challenges. That’s not a good sign for the US economy.

Americans shopped less in December, causing the first drop in retail sales since the summer.

Sales dropped 1.9% compared with November, adjusted for seasonal swings, the Census Bureau reported Friday.

The decline in sales coincided with the surge in Covid cases due to the highly infectious Omicron variant. In July, the last time sales dropped, it was on the back of cases rising due to the Delta variant.

Restaurants and bars registered a 0.8% decline in sales in December as people stayed home to protect themselves against the virus, for example.

But there was more at play than Omicron alone.

Online retail witnessed a sharp 8.7% drop last month, likely because people shopped earlier for the holidays after stores and brands warned of possible shortages and delivery delays in the fall.

The pullback in retail sales is “disconcerting,” said Lydia Boussour, lead US economist at Oxford Economics. But she noted that holiday shopping season was longer than ever, with stores urging customers to get their gift buying done early to avoid shipping delays from the jammed supply chain.

Still, the weak end to the year doesn’t bode well for consumer spending, which is the backbone of the US economy.

Weaker spending could weigh on economic growth in the final quarter of the year and slow momentum going into the first quarter of 2022, Boussour said.

On the whole, however, it was still a good year for the retail sector, with sales rising 19.3%.

“Consumer spending will remain the cornerstone of economic growth this year but the near-term path will be choppy amid surging Omicron cases,” she added.

Consumer spending should rebound in the spring, however, given the combination of a strong labor market, income growth and excess savings. That “will support above-trend consumption growth this year,” Boussour said.

Inflation and Covid variants weigh on consumer sentiment

Yet consumers aren’t feeling so hot at the moment. The start to 2022 has been rough, amid the Omicron surge and inflation that keeps trending higher.

Consumer sentiment dropped in January, according to preliminary data from the University of Michigan, falling to 68.8, or the second lowest level in a decade.

“While the Delta and Omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate,” said Richard Curtin, chief economist of the Surveys of Consumers.

Lower income households felt more negative about inflation as well as the economic outlook, compared with higher income households.

A third of survey respondents said they were financially worse off than a year earlier, the worst reading since 2014. It was also more common for lower income households to report worsening finances.

Almost half of the surveyed consumers expect inflation to outpace their wage increases and lead to real income declines. Only 17% of respondents expected real income gains this year.

On top of that, “confidence in government economic policies is at its lowest level since 2014,” said Curtin.