Retail Sales Stronger Than Appearance
Core retail sales and upward revisions to January bolstered the report.
February retail sales fell 0.4%, giving back only a portion of the upwardly revised January strength. Retail sales surged 3.2% in January, 0.2% more than initially reported. The largest declines showed up in traditional department stores, restaurants, furniture and vehicles. All those categories are still up substantially from the suppressed levels of late 2022, when consumers pulled back.
The control group, which goes into the calculation of real GDP growth, rose 0.5% in February after rising by an upwardly revised 2.3% in January. That confirms our view that consumer spending accelerated in the first quarter after losing momentum in the fourth quarter. That will help to drain inventories and explain the persistence we are seeing in inflation, which looks like it is getting stickier.
Traditional department store sales experienced the largest drop, -4.0% in February, after a stunning 18.1% surge in January. That gain was lifted by a record bump in Social Security payments in January; baby boomers are the largest demographic to shop at traditional department stores. The January increase was the third largest on record; only the increases as the economy emerged from lockdowns were larger. Sales at restaurants and bars declined 2.2%; I would say the “dry” January was pushed into February, but sales are still up at those establishments significantly since December.
Sales of motor vehicles and parts fell 1.8% in February, which was already telegraphed by the decline in unit sales reported earlier in the month by dealers. Inventories of new vehicles remain tight due to supply chain problems. A shortage of workers at suppliers has supplanted chip shortages as the primary supply chain problem.
Furniture store sales fell -2.5% but were still up from the suppressed levels of the fourth quarter. Electronic and appliance sales held up better for the month. Building materials, which feed more directly into new home construction, were weaker. Spending on apparel declined 0.8% and sporting goods store sales fell 0.5%. Retailers were slow to discount in February, which no doubt exacerbated the weakness in apparel sales.
However, it is hard to escape the rebound in consumer spending at the start of the year after a lackluster holiday season. This tracks the acceleration that we saw in employment in the first two months of the year, which could slow in response to the tightening of credit conditions in the banking industry. Employment gains were driven by firms with less than 250 workers; those are the most at risk from the current financial market instability.
Retail sales were much stronger than the headlines figures suggest, given the gains in core retail sales and the upward revisions to what was already a stellar January. A week ago, this would have further cemented the Federal Reserve’s commitment to raise rates. Recent financial market instability has complicated the calculus. The Fed is likely to pause at its meeting next week, even as members of the Federal Open Market Committee mark up their trajectory for rate hikes going forward. The Fed is carefully weighing the risks of inflation against those for a less controlled rise in unemployment due to financial instability.