By Lucia Mutikani

WASHINGTON (Reuters) -U.S. 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 prompted some 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% in November.

Though underlying inflation slowed last month, overall consumer prices increased by the most in nine months. Labor 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% last month after an upwardly revised 0.8% 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% after a previously reported 0.7% rise in November. Retail sales increased 3.9% year-on-year in December.

Sales at auto dealerships rose 0.7% after accelerating 3.1% in November. Receipts at furniture stores shot up 2.3% while those at clothing retailers rebounded 1.5%.

Sporting goods, hobby, musical instrument and bookstore sales jumped 2.6%. Receipts at miscellaneous store retailers, including gift shops and florists, soared 4.3%.

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

Building material store sales dropped 2.0% while higher gasoline prices boosted receipts at services stations by 1.5%.

Sentiment surveys have suggested consumers could be rushing to purchase goods in anticipation of tariffs from President-elect Donald Trump’s incoming administration. Trump, who will be inaugurated next week, has pledged broad tariffs on imported goods, which would raise prices for consumers.

Bank of America Institute, however, said the bank’s data showed “little evidence that these concerns were spurring” consumers to buy goods over the last few months of 2024.

STRONG CORE SALES

Retail sales excluding automobiles, gasoline, building materials and food services surged 0.7% last month after an unrevised 0.4% 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% annualized rate in the fourth quarter after accelerating at a 3.7% pace in the July-September quarter. Capital Economics raised its GDP growth forecast for the last quarter to a 2.9% rate from a 2.7% pace earlier.

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

The Fed is not expected to cut rates this month after forecasting only two reductions 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 Trump’s policies, including mass deportations of undocumented immigrants and tax cuts also deemed as inflationary.

Fed Governor Christopher Waller on Thursday expressed hope that inflation would continue to ease and possibly allow the central bank to cut rates again sooner and faster than expected.

U.S. Treasury yields fell on Waller’s comments, while the dollar slipped against a basket of currencies. Stocks on Wall Street were lower.

The Fed’s 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.

“Tariffs remain the key downside risk this year, and the burden of higher inflation on consumer goods would fall disproportionately on lower-income households, adding to the risks of a two-speed U.S. consumer,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.

Low-income households are already struggling, with little or no savings buffer. 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 unseasonably cold weather, with unadjusted applications surging 15,175 in Michigan. There were also sizeable increases in Illinois, Ohio and Missouri.

Filings vaulted 13,074 in California. Economists were divided on whether wildfires were the main driver.

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 Jan. 4, the claims report showed.

“The job market should remain sturdy in 2025,” said Stuart Hoffman, chief economic advisor at PNC Financial. “One downside risk for job growth is the potential for immigration restrictions from the incoming new administration, which would constrain the number of available workers.”

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

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