U.S. retail sales rebounded in January after a disappointing holiday season, indicating that the economy remains resilient despite fears of an oncoming recession.

The Monthly Retail Sales Report, released by the U.S. Department of Commerce, recorded an increase of 3% in sales from December 2022 to January 2023. Consumers spent an estimated $697 billion, the biggest increase in retail sales since March 2021.

The sharp rise in revenue paints a picture of a surprisingly elastic economy, a source of frustration for the Federal Reserve, which has been counting on a reduction in consumer spending to fight still-rising inflation rates. Conversely, the report has offered retailers a renewed sense of cautious optimism as customers, buoyed by a tight labor market, remain comfortable handing over their hard-earned income for goods and services. 

Last month, the Labor Department reported that the U.S. added 517,000 jobs, far outpacing economists’ expectations. The unemployment rate sits at 3.4%, the lowest it’s been in more than five decades.

 “Employment data has all been very, very healthy,” said Steven Ricchiuo, chief economist at Mizuho Securities USA. “That generates additional income-related growth, and it’s the income-related growth that’s really supporting the consumer.”

None of the retail industry sectors reported a decrease in sales. Purchases of automobiles went up significantly, meeting economist projections, as did furniture, electronics, and food services sales. Department stores saw a massive increase, reporting a 17.5% bump from December 2022.

Taken together, the receipts indicate that consumers, feeling increasingly secure, are shelling out more for extravagant goods in the certainty of a guaranteed paycheck.

Holiday sales in the closing months of last year were trending downward from a combination of inflation, high interest rates, and widespread fears of a possible recession. According to Christopher Low, chief economist at FHN Financial, economists had been expecting January’s sales numbers to make up for the sector’s lost earnings. Still, he said, they were surprised by the robustness of the figures. 

“It’s as if spending never really slowed down at all when you look at the three months collectively,” Low said.

Job growth and income restoration have made consumers more confident according to Rubeela Farooqi, chief economist at High-Frequency Economics.

While robust sales and a tight labor market sound like exclusively good news, the combination looks less favorable to the Federal Reserve, which has been aggressively raising interest rates to cool the economy and lower inflation since March 2022.

While inflation has decreased somewhat, prices are still stubbornly high and getting higher, with the January CPI sitting at 6.4%. According to Ricchiuo, the numbers indicate that the Fed will be less likely to pivot away from interest hikes to balance out the high consumer spending rates and low unemployment.

Despite the positive report, Farooqi cautioned that January is too early to clearly understand where the economy is headed. 

“It looks like the consumer has staying power based on these numbers, but we really have to wait to see how this evolves,” Farooqi said. “Borrowing costs are very high, consumers are relying more and more on credit card debt…it remains to be seen when that tipping point comes, but we do think that consumer spending and growth is going to slow down over the next several quarters.”