By Lucia Mutikani
WASHINGTON (Reuters) – U.S. retail sales fell by the most in 10 months in January, but economists cautioned against reading too much into the sharp drop amid frigid temperatures and difficulties adjusting the data for seasonal fluctuations at the start of the year.
Still, the report from the Commerce Department on Thursday suggested slowing momentum in consumer spending as retail sales were revised lower in November and December. But with a still-tight labor market continuing to churn out jobs at a strong clip and wage growth remaining elevated, consumer spending is far from collapsing. That should sustain the economic expansion.
“Retail sales in January declined sharply, however, revised seasonal factors and inclement weather exaggerated the degree of the slowing in spending following the holiday spending spree,” said Kathy Bostjancic, chief economist at Nationwide.
Retail sales tumbled 0.8% last month, the biggest drop since March 2023, the Commerce Department’s Census Bureau said. Data for December was revised lower to show sales rising 0.4% instead of 0.6% as previously reported. November sales were also revised down to show them unchanged, rather than rising 0.3%.
Economists polled by Reuters had forecast retail sales dipping 0.1% in January.
Retail sales are mostly goods and are not adjusted for inflation. They increased 0.6% year-on-year in January.
Unadjusted retail sales typically fall in January. Seasonal factors, the model that the government uses to strip out seasonal fluctuations from the data, expected a smaller drop in sales this January compared to previous years. The decline was larger than had been anticipated by the seasonal factors, resulting in the bigger drop in adjusted sales last month.
Economic data is generally difficult to seasonally adjust at the start of the year, a process that has also been made difficult by distortions caused by the COVID-19 pandemic.
The weather impact was evident in the 4.1% plunge in building material and garden equipment store sales. Receipts at motor vehicles and parts dealers also tumbled 1.7%. Snow storms blanketed large swathes of the country in January. The other major drag on sales came from a 1.7% drop in gasoline station receipts, reflecting lower prices at the pump.
Freezing temperatures also slammed production at factories last month, with output falling 0.5%, a separate report from the Federal Reserve showed on Thursday. Manufacturing production gained 0.1% in December.
The weak reports did not change expectations that the U.S. central bank would refrain from cutting interest rates before May. There are signs that goods price deflation is nearing an end.
A third report from the Labor Department’s Bureau of Labor Statistics showed import prices posting their biggest gain in nearly two years in January as the costs for petroleum and other goods increased strongly. That followed on the heels of stronger-than-expected consumer price readings in January.
“The latest news on import prices is consistent with the idea that the recent weakness in (core) goods inflation will end, but it is not totally obvious that it implies a surge in domestic prices to come,” said Daniel Silver, an economist at JPMorgan in New York.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
BROAD WEAKNESS
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
Online sales dropped 0.8% in January, payback after surging 1.4% in December. There were decreases in sales at electronics and appliance outlets as well as clothing, health and personal care, and sporting goods, hobby, musical instrument and book stores. But sales at food services and drinking places, the only services component in the report, increased 0.7%.
Economists view dining out as a key indicator of household finances. Furniture stores receipts surged 1.5%.
Though momentum is slowing, consumer spending remains healthy, thanks to the resilient labor market and rising household purchasing power as inflation subsides.
A fourth report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 8,000 to a seasonally adjusted 212,000 for the week ended Feb. 10.
Claims are bouncing around low levels despite a recent rush of high-profile layoffs, mostly in the technology and media sectors. Economists had forecast 220,000 claims for the latest week. Companies are mostly reluctant to layoff workers after struggling to fill jobs during and after the COVID-19 pandemic.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 30,000 to 1.895 million during the week ending Feb. 3, the claims report showed.
“Cutting through the noise in the data, we expect that consumer spending will rise at a solid pace this year,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics in New York. “Real disposable incomes are growing at a decent pace, and we see little reason to expect a surge in household saving because balance sheets are solid and rising house prices and equity markets are adding to net wealth.”
Retail sales excluding automobiles, gasoline, building materials and food services decreased 0.4% in January. The so-called core retail sales measure corresponds most closely with the consumer spending component of GDP.
Core sales for December were revised down to show them rising 0.6% instead of the previously reported 0.8%. They rose 0.2% in November, downgraded from the previously reported 0.5%.
The revisions to November and December data suggested spending ended the fourth quarter with less vigor than previously thought, putting consumption on a slower growth trajectory at the start of this quarter.
That also implied the fourth-quarter’s economic growth estimate of a 3.3% annualized pace could be trimmed when the government publishes its revision later this month.
“The consumption path in the fourth quarter to the first quarter now looks softer,” said Ellen Zentner, chief economist at Morgan Stanley in New York. “The report supports our view that the economy is strong but cooling. There is no reason for the Fed to rush the next move in rates.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
