April 12 (Bloomberg) -- Retail sales in the U.S. dropped in March by the most in nine months, pointing to a slowdown in consumer spending as the first quarter drew to a close.
Purchases fell 0.4 percent, the biggest setback since June, after jumping 1 percent in February, according to Commerce Department figures issued today in Washington. Consumer sentiment took a hit this month after employment cooled, a report from Thomson Reuters/University of Michigan also showed.
The sales data prompted economists to trim consumer-spending forecasts from what was projected to be the best quarter in two years. Gains in hiring and wages will be needed to ensure any slowdown proves temporary as federal budget cuts and an increase in the payroll tax restrain the expansion.
“It’s not as if things are falling apart, they’re just softening relative to a strong start to the quarter,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The first quarter still looks better than had been expected a few months ago, particularly in the face of the headwinds.”
The Standard & Poor’s 500 Index dropped 0.3 percent to 1,588.85 at the close in New York, retreating from yesterday’s record. The yield on the benchmark 10-year note fell to 1.72 percent from 1.79 percent yesterday as a slacker growth adds to speculation the Federal Reserve won’t cut back on record monetary stimulus.
Just as the U.S. shows signs of slowing, data from Europe indicate its major economies are beginning to emerge from a recession. Factory production in the 17-nation euro-area expanded 0.4 percent in February, more than economists forecast.
Feroli was among economists cutting U.S. tracking growth estimates for the first quarter following the retail sales data. He now sees growth at a 3 percent annualized pace, compared with a 3.3 percent gain prior to today’s report. As recently as December, Feroli projected the economy would grow at a 1 percent pace from January through March. The economy expanded at a 0.4 percent rate in the last three months of 2012.
Gains in stocks and home prices are boosting household wealth, strengthening the ability of American consumers to withstand federal spending cuts and tax increases.
The S&P 500 is up more than 11 percent this year. The median price of an existing house climbed 11.6 percent in the 12 months ended February, the biggest year-over-year advance since November 2005, figures from the National Association of Realtors show.
Growth this quarter will probably come in at around 1.5 percent as consumer spending cools and the automatic across-the-board cuts in planned federal spending, or sequestration, has the biggest impact, according to Feroli.
“By the time we get to the second half of the year, some of the more severe fiscal headwinds should be fading and second-half growth will look better,” Feroli said.
Economists earlier this month projected household expenditures would climb at a 3 percent rate in the first quarter, making it the strongest since the first three months of 2011, according to the median forecast in a Bloomberg survey taken from April 5 to April 9.
Confidence among Americans fell in April to a nine-month low as households grew more pessimistic about the outlook for the economy, another report today showed. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 a month earlier.
“Clearly the economy is still pressuring the consumer out there,” Ken Martindale, chief executive officer of drugstore chain Rite Aid Corp., said during an April 11 earnings call. Even though the retailer will like to get away from having to offer promotions to boost sales, the economic landscape still warrants focusing on how to lure customers, he said.
A lack of inflation remains one constant of this expansion. Wholesale prices fell more than forecast in March as the cost of energy slumped by the most in three years, data from the Labor Department also showed today. The 0.6 percent drop in the producer price index was the biggest since May and followed a 0.7 percent gain in the prior month.
The retail sales figures, which aren’t adjusted for prices, also reflected the decrease in fuel costs. Filling-station receipts dropped 2.2 percent last month, according to the Commerce Department data.
The average cost of a gallon of regular fuel at the pump dropped about 13 cents to end last month at $3.63, the first decrease in March since AAA, the biggest U.S. auto group, began keeping data in 2004. That may prevent spending from slowing even more.
The median forecast of 85 economists surveyed by Bloomberg called for an unchanged reading in March retail sales. Estimates ranged from a decline of 0.6 percent to an advance of 0.7 percent. The Commerce Department revised the February reading down from an initially reported 1.1 percent increase, and also cut January to show a 0.1 percent drop from a previously reported 0.2 percent gain.
Seven of 13 major categories showed declines last month, led by a 1.2 percent decrease at general merchandise outlets, which includes department stores, and a 1.6 percent drop at electronics dealers.
Sales at automobile and parts dealers fell 0.6 percent after a 1.3 percent gain the prior month, today’s report showed. Industry figures, which are the ones used to calculate gross domestic product, showed car and light truck sales dipped in March, falling to a 15.2 million annual rate from 15.3 million the prior month, according to Ward’s Automotive Group. The first quarter sales average was the highest since 2008.
Consumer spending had held up early in the year even as taxes took more from Americans’ paychecks. Congress agreed to a fiscal pact on Jan. 1 that allowed the tax used to finance Social Security to revert to 6.2 percent, where it was in 2010, from 4.2 percent.
“Households are now making those difficult choices on how to adjust spending,” said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York, who projected sales would drop. “We have no steam going into the second quarter.”
Part of the reason may also be that employment is slowing. Payrolls grew by 88,000 last month, the smallest increase since June, the Labor Department said on April 5. Average hourly earnings were unchanged in March from the prior month, the weakest showing since October.
The University of Michigan’s sentiment report showed Americans are now more likely to expect lower permanent after-tax incomes. At the same time, they maintained positive buying plans for automobiles and houses. More consumers -- 32 percent - - said they expected the unemployment rate to increase, compared with 24 percent who said it will decline.
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