US retail sales fell moderately in February, likely payback after the prior month's outsized increase, but the underlying momentum remained strong, suggesting the economy continued to expand in the first quarter despite higher borrowing costs.
The report from the Commerce Department on Wednesday followed on the heel of news last week showing solid job growth in February, and raised hope that the Federal Reserve could fight inflation without pushing the economy into recession.
News on inflation was somewhat encouraging, with other data on Wednesday showing producer prices unexpectedly falling last month, leading to the smallest year-on-year increase in nearly two years.
Uncertainty
Retail sales dropped 0.4% last month. Data for January was revised higher to show retail sales rising 3.2% instead of 3.0% as previously reported. Economists polled by Reuters had forecast sales would fall 0.3%, with estimates ranging from a 1.0% decline to a 0.5% increase.
Retail sales are mostly goods and are not adjusted for inflation. Economists said challenges adjusting the data for shifts in spending patterns at the end and start of the year as well as higher prices were among the factors that had exaggerated January's retail sales surge.
Savings Accumulated
Consumers also still have a huge amount of savings accumulated during the COVID-19 pandemic. The Fed has raised its benchmark overnight interest rate by 450 basis points since last March from the near-zero level to the current 4.50%-4.75% range.
According to Bank of America Securities, an analysis of the bank's card data showed that services spending significantly outperformed goods spending in February.
While this suggests the rotation of spending back to services helped to undercut retail sales last month, it should support overall consumer spending.
Consumer Spending
Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.5% last month. These so-called core retail sales increased 2.3%% in January, revised up from the previously reported 1.7%.
Core retail sales correspond most closely with the consumer spending component of gross domestic product.
Consumer spending, which accounts for more than two-thirds of the US economy, slowed in the fourth quarter, helping to restrict GDP growth to a 2.7% annualized rate.
Growth estimates for the first quarter are currently as high as a 2.6% pace.
News by Reuters, additional reporting by ESM – your source for the latest retail news. Click subscribe to sign up to ESM: European Supermarket Magazine.
