Retail Sales Drop in January

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales experienced the largest decline in nearly two years in January, dropping by 0.9%, likely due to adverse weather conditions, wildfires, and vehicle shortages, indicating a potential slowdown in economic growth early in the first quarter.

Despite this unexpected decline, which followed four months of significant increases, analysts believe it does not signal a major shift in consumer spending. A substantial upward revision to December’s sales helped mitigate the report’s downturn effects. Additionally, economists acknowledge the complexities of seasonal adjustments during this time of year.

The Federal Reserve is still expected to maintain current interest rates until the second half of the year. Former President Trump’s administration’s policies, particularly tariffs, have created uncertainty in the economy.

Robert Frick, a corporate economist at Navy Federal Credit Union, remarked, “The drop was dramatic, but several mitigating factors show there’s no cause for alarm.”

The report from the Commerce Department highlighted that retail sales dropped by 0.9% in January, marking the biggest decrease since March 2023, following a revised 0.7% increase in December. Economists anticipated a decrease of only 0.1%. However, retail sales grew 4.2% compared to January of the previous year.

Significant snowfall and freezing temperatures affected shopping patterns across much of the country, while wildfires in Los Angeles hindered face-to-face shopping activities. According to Jay Hawkins, a senior economist at PNC Financial, adverse weather likely contributed to muted shopping experiences.

Concerns over rising prices and the effects of tariffs may also have influenced consumer behavior. A University of Michigan consumer survey indicated deteriorating sentiment, with one-year inflation expectations climbing to a 15-month peak in early February.

Analysts are watching to see if January’s sales drop marks a continuing trend or is simply a temporary response to weather conditions. Some tariffs, including a 25% tariff on Mexican and Canadian goods, were delayed until March, while a 10% tariff on Chinese goods implemented this month may weigh on consumer choices.

On Wall Street, stock movements remained subdued Friday, with the dollar easing and U.S. Treasury yields falling as the outlook for the Fed’s interest rate policies remained unchanged.

Economic Indicators

• The U.S. central bank held its benchmark overnight interest rate steady in January, maintaining it within the 4.25%-4.50% range after previous cuts during the easing cycle.
• Retail sales from motor vehicle dealerships fell 2.8%, compounded by weather conditions and inventory shortages.
• Other retail sectors like sporting goods, bookstores, and online sales also saw declines, while food services experienced a slight increase in sales.
• Retail sales excluding automobiles, gasoline, building materials, and food services fell 0.8% after previously being reported as a gain of 0.8% in December.

Despite January’s decline, economists still see potential for sales recovery, emphasizing the economy’s underlying strength driven by labor market resilience and rising household wealth. The Atlanta Fed has slightly revised its first-quarter GDP growth estimate, indicating a potential slowdown from 2.9% to 2.3%.

Tuan Nguyen, a U.S. economist at RSM US, concluded, “If that strength persists, we should expect sales to rebound in the coming months.”