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U.S. Retail Sales Stumble in February

The February retail sales report revealed a drop in sales, but the decline followed a much larger and more broadbased surge in all of the major components in January, to leave the robust sales trajectory for the first quarter intact. Indeed, retail sales have registered a powerful uptrend ever since the November report of aggressive sales, due partly to the extraordinarily mild weather. A return to normal weather in February took a chunk back, but a surprisingly small one.

The drop in retail sales in February was a larger-than-expected 1.3%, while the ex-auto component declined 0.4%. January sales were revised higher, to a 2.9% gain, from 2.3% previously. The ex-autos figure for January was revised up to 2.6% from 2.2%. In February there was a 4.6% decline in motor vehicles and parts, a 4% decline in furniture, a 3.3% decline in clothing, and a 1.6% drop in gas sales. The market was braced for a February payback from soaring January figures, yet the pattern left only a partial correction.

With weekly sales data pointing to a strong March, there doesn't appear to be much of a prospect for any remaining "correction" that might have been seen in February to be pushed back into March. As it stands, consumption appears to have ratcheted upward in the first quarter to a solid level, with no trouble sustaining this higher pace.

UNEXPECTED WEAKNESS. Our gross domestic product (GDP) estimate for the first quarter remains at 5%, though we have boosted our first-quarter consumption forecast to 5.4% from 5%. The first-quarter figures should follow an expected boost in the fourth quarter, to 1.8% from 1.6%. Today's data imply a tiny upward bump to the reported 1.2% fourth-quarter real consumption growth rate.

An unexpected weakness in the report was the auto component, which is not used for estimating GDP, and the gasoline-station component, which implies price rather than volume weakness. The remaining components were, on net, stronger than expected, given the revisions. In retail sales "ex-auto and ex-gasoline," we saw a big 2.4% surge in January, but only a 0.3% correction in February.

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