Dive Brief:

• Retail sales rose 0.6% in November after a slight decline the prior month even though high prices and weakness in the labor market held down consumer sentiments for much of last year.
• Sales increased in 10 out of 13 types of goods, including clothing, building materials, gasoline and motor vehicles, the Census Bureau said Wednesday. Spending at restaurants and bars, the only service category included in the data, rose 0.6%.
• Consumers have grown accustomed to the shock from tariff-induced price increases and will probably step up purchases in coming months, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, predicted Wednesday. “The shock has worn off,” he said. “They're going to start to buy again,” Bostic added, while noting the risk that higher consumption may spur inflation.

Dive Insight:

Consumer sentiment this month hit the highest level since September but is still nearly 25% lower than January 2025, according to the University of Michigan’s preliminary survey of consumers.

Households “continue to be focused primarily on kitchen table issues like high prices and softening labor markets,” Joanne Hsu, director of the survey of consumers, said in a statement.

Consumer expectations for finding a job fell to a record low last month, according to the New York Fed. The mean perceived probability of finding a new job in the event of job loss fell by 4.2 percentage points to 43.1%, the New York Fed said.

Hiring by U.S. employers last month fell below expectations, with payrolls expanding by just 50,000, the Bureau of Labor Statistics said Friday. The unemployment rate edged lower to 4.4% from 4.5% in November, the BLS reported, but still exceeds the 4% level in January 2025.

The economy created only about 600,000 jobs last year compared with 2 million in 2024, Anna Paulson, president of the Federal Reserve Bank of Philadelphia, said Wednesday, noting a decline in both the demand and supply of labor.

“The sharp drop in immigration has slowed the growth of labor supply,” she said in a speech. “On the demand side, firms — both nationally and here in Philadelphia — tell us that uncertainty is holding back hiring as they consider a range of factors, including trade policy and the potential for artificial intelligence to transform the need for workers,” Paulson said.

While spending by affluent consumers remains robust, many lower-income households have trimmed spending, according to recent surveys.

“A lot of surveys say that Americans are feeling economic hardship right now, especially middle class and lower income Americans,” Minneapolis Fed President Neel Kashkari said Wednesday.

“When I talk to businesses that have a big retail presence, they say that their middle class and lower income customers are spending in a manner consistent with a recession,” he said. “They're pinching their pennies, they're trading down, they're looking for deals.”

Inflation, rather than low hiring and the soft labor market, is probably prompting the restraint among lower-income consumers, underscoring the need for policymakers not to lose sight of their 2% inflation goal, Kashkari said. 

“We're in this tricky situation with monetary policy,” he said in answer to a question. “We really need to bring inflation all the way back down to 2% so that we can get the economy in a more normal environment and people can feel good about their spending power and feel good about their economic prospects.”