Implications: Despite rising less than the consensus expected, retail sales reached an all-time high in December, eclipsing the mark set in November 2007. Sales are up almost 8% in the past year and were up at a very rapid annual rate of 13% in the past three months. Overall, real (inflation-adjusted) consumer spending likely grew at about a 4% annual rate in the fourth quarter, the fastest pace since 2006. Although retail sales in December were somewhat softer than the consensus anticipated, it's important to remember that these figures come on the heels of two great retail sales reports in a row. And remember, all this strength is coming before the Fed's quantitative easing should be having an impact and before the tax deal in Washington is implemented. We expect sales to continue higher because earnings are up, consumers are paying down debt more slowly, and consumers' financial obligations are now the smallest share of income since the mid-1990s. In other news this morning, business inventories increased only 0.2% in December. Inventories will be a significant drag on the growth rate of real GDP in Q4, but that leaves room for faster growth in 2011.
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