In January, consumers tightened their belts more than expected, with retail sales dropping 0.8% from December. This decline was steeper than economists had anticipated, as they had forecasted only a 0.1% dip. The previous month’s sales were also revised down to a 0.4% gain from the previously reported 0.6%.
Despite the decline, spending in January was still 0.6% higher compared to the same period in 2024. The cold weather and higher interest rates were identified as factors that hampered consumer demand.
Tom McGee, CEO of the International Council of Shopping Centers, commented on the retail sales report, stating, “Today’s retail sales report suggests that consumers are being cautious about their spending despite a gradual uptick in consumer confidence.”
Economists had expected a softer headline figure for January due to several factors, including unfavorable weather conditions, increased borrowing costs, and lower gasoline prices. However, the extent to which Americans pulled back on spending was more significant than anticipated. Even core retail sales, which exclude car and fuel sales that tend to be more volatile, fell by 0.5%, surpassing economists’ expectations of a 0.3% uptick.
Jeffrey Roach, Chief Economist at LPL Financial, expressed his interpretation of the report, stating, “From this report, we see that consumers are likely becoming more price-conscious and perhaps, this is the first sign that the spending splurge is nearing the end.”
Spending was down across various categories, particularly discretionary areas. Car dealerships, home improvement retailers, sporting goods and hobby stores, clothing retailers, and electronics and appliances stores all experienced declines in month-over-month spending. Even non-store retailers, which include most e-commerce businesses, saw a 0.8% dip following months of steady outperformance.
However, some sectors managed to see an increase in spending. Restaurants and bars, department stores, grocery stores, and home furnishing retailers were among the few that experienced higher spending last month.
Discretionary Goods Volumes Expected to Decline in 2024
According to David Silverman, a senior director at Fitch Ratings, discretionary goods volumes are predicted to decrease in 2024. This decline can be attributed to challenging multi-year comparisons since the beginning of the pandemic, as well as a variety of other factors impacting consumer spending.
Factors Affecting Spending
Robert Frick, corporate economist with Navy Federal Credit Union, highlights a few additional factors that contributed to the decrease in spending. Firstly, December’s spending levels were boosted by holiday shopping, resulting in a higher baseline for comparison. Furthermore, cold weather and unfavorable seasonal adjustments further impacted spending.
The Role of Seasonal Adjustments
The Census Bureau regularly adjusts its data for seasonality, which has an impact on monthly reports. Michael Gapen, a U.S. economist at BofA Securities, suggests that the recent adjustments benefited December’s report at the expense of January’s figures.
Impact on Vehicle Sales
Higher interest rates have discouraged consumers from making significant purchases, particularly in the automotive sector. According to the Bureau of Economic Analysis, sales of cars and light trucks saw a decline of approximately 7% in January compared to December. Thursday’s retail-spending statistics also reflected this trend, with sales at motor-vehicle and parts dealers dropping by 1.7% from December and falling 1.6% compared to the previous year.
Consumer Spending Outlook
Despite the weak report, Robert Frick remains cautiously optimistic about consumer spending. He believes that while this year may not see exceptional growth in spending, factors such as real wage gains and increasing employment will contribute to overall economic expansion.
