Sluggish Retail Sales Cast Pall on U.S. Consumer Spending

  • February drop broad-based with eight of 13 categories falling
  • Revisions wipe away strong January, recasting landscape

U.S. Retail Sales Fall in Feb., Jan. Revised Down

American retailers had little to cheer about in February and previously reported strong readings for the prior month were wiped away, putting the highly anticipated pickup in consumer spending on hold yet again.

Sales declined 0.1 percent last month, reflecting setbacks in eight of 13 major merchant categories, figures from the Commerce Department showed Tuesday in Washington. But the real disappointment came in revisions to January that turned what had been a surprisingly robust 0.2 percent gain into a dramatic 0.4 percent flop.

Economists had been penciling in an acceleration in household purchases, which account for almost 70 percent of gross domestic product, to boost growth this quarter and make up for continued weakness in manufacturing and business investment. Federal Reserve policy makers meeting this week must now try to understand what’s holding back consumers even amid the unqualified positive backdrop of a strengthening job market and low gasoline prices.  

“When we have pockets of weakness in other sectors of the economy like manufacturing, we certainly don’t want to see the U.S. consumer, which is the sole driver for growth right now, beginning to pull back," said Brett Ryan, a U.S. economist at Deutsche Bank in New York, who correctly projected the drop in sales last month. “The hope of this eventual improvement in spending because of low energy prices - that’s starting to recede at this point."

The figures from the report that feed directly into the government’s growth calculations were equally weak. The so-called control group, which excludes such categories as autos, gasoline stations and building materials, was unchanged last month after a revised 0.2 percent increase in January that had previously been recorded as a 0.6 percent gain.

Several economists trimmed tracking estimates for consumer spending this quarter following the report, with those at Barclays Plc taking theirs down to a 2.6 percent annualized rate from 3.3 percent. That dropped their GDP forecast to 1.9 percent from 2.4 percent. Colleagues at JPMorgan Chase & Co. projected a 2.9 percent gain in spending, down from an earlier forecast of 3.4 percent.

Household purchases, which climbed at a 2 percent rate in the last three months of the year, were projected to carry the world’s largest economy to a higher plane this quarter after growth slowed to a 1 percent rate at the end of 2015.

One explanation for the soft readings this year could be the volatility in financial markets that pushed the Standard & Poor’s 500 Index down to an almost two-year low in February. High-income households, those most likely to have been shaken by the plunge in equities, account for an outsize share of spending.

Financial Turmoil

“Pinpointing the reason for the performance of any given retail sales report is always conjectural, but financial market volatility in the first two months of the year seems as likely a reason as any for the softer tone to the recent numbers, particularly since it is harder to place the blame on labor market outcomes,” Mike Feroli, chief U.S. economist at JPMorgan in New York, said in a research note.

One caveat, in addition to its susceptibility to large revisions, is that retail sales make up a little less than half of all consumer spending. They don’t include services such as visits to the doctor’s office or utility payments. Heating bills will probably rebound this quarter after temperatures turned more seasonable at the start of the year following an unusually warm end to 2015.

Other data Tuesday showed manufacturing may be starting to bottom while homebuilding is struggling to gain traction. 

Fed Factory Gauge

The Federal Reserve Bank of New York’s factory index climbed to 0.6 in March, the highest since July, from minus 16.6 the prior month. The gauge of new orders, a more forward-looking indicator, climbed to the highest since September 2014. 

Confidence among U.S. homebuilders held in March at a nine-month low as sales prospects waned, a sign the housing market may be struggling to accelerate as the spring-selling season approaches. The National Association of Home Builders/Wells Fargo builder sentiment index was 58 this month, matching the February reading that was the weakest since May, figures from the Washington-based group showed. Nonetheless, readings greater than 50 mean more respondents reported good market conditions.

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