Retail and food services sales in the United States fell in February, as consumers returned to a pattern of relatively robust spending while coping with high inflation and rising interest rates.
The February Retail Sales Report, released by the U.S. The Department of Commerce on Wednesday, recorded an estimated $697.9 billion in retail and food services sales, a seasonally adjusted decline of 0.4%. January’s sales, which were initially recorded as a 3% increase, were revised up to 3.2%. Retail and food services sales are not adjusted for inflation.
While the data shows that consumers are still spending, retailers of luxury items are seeing worrisome declines. The Federal Reserve Board will face a dilemma when it meets next week to decide whether to continue raising interest rates, as it weighs the strong economy versus the financial crisis touched off by the recent collapses of Silicon Valley Bank and Signature Bank, the second and third largest bank collapses in history.
Most economists attributed January’s burst of consumer spending to a weather-related anomaly in which a cold, wet November and December depressed economic activity before giving way to the warmest January on record in the United States.
“More people were out and about in the sunshine,” said James Knightly, chief international economist at ING Financial Markets. “And that just sort of stimulates activity and it encourages people to venture out from their homes. That, I think, is a key reason why January was so strong.”
A tight labor market has managed to sustain consumer spending. The United States added over 800,000 jobs in the first two months of 2023, and unemployment, while up slightly from January’s low of 3.4%, was still incredibly low by historical standards at 3.6%.
However, a slightly decreased but still elevated inflation rate has significantly reduced the amount that a steady but stagnant income can buy, leading to a shift in where consumers are putting their money.
After reporting a massive 17.5% increase in sales in January, department stores saw receipts fall by 4%. Furniture retailers, clothing stores, and restaurants all saw significant decreases in February revenue, as did miscellaneous store retailers, which include establishments with unique characteristics, such as florists and pet supply stores. Automobile purchases fell by 1.8%, meeting economist projections.
While big-ticket retailers saw sales decline, food, and beverage store sales rose by 0.5%, and health & personal care sales rose by 0.9%. According to Lindsey Piegza, chief economist and managing director of Stifel Financial Corp., a rise in consumption of essential goods indicates that customers, while still open to spending, are having to make more careful decisions about how and what to spend their money on.
“This is something that consumers do when they’re increasingly concerned about their financial footing,” said Piegza. “Consumers are very dramatically shifting their spending habits, shifting what they’re buying on a month-to-month basis, a signal that they are increasingly on fragile footing from the household balance sheet perspective.”
Rambo Sol, a manager at Furniture City Superstore in New York City, attributed the “dramatic” decline in sales to increasing prices and mounting consumer debt.
“Someone who has credit card debt, they’re just catching up on their own bills,” Sol said. “They’re not really going shopping, they’re not spending money on furniture.”
A reduction in spending is ultimately good news for the Federal Reserve, which has been hiking interest rates in an effort to curb consumer spending, cool the economy, and ultimately lower inflation.
“This shouldn’t be an alarm, but rather an encouraging scenario that earlier policy initiatives are now having the intended effect,” Piegza said. “The Fed is trying to slow the economy via a weakened level of consumption, a weakened level of investment, and then by extension, that will translate into more benign inflation. So this is exactly what the Fed wants to see.”
However, while the higher interest rates may have succeeded at bringing down consumer spending, they have caused unintended consequences elsewhere in the United States economy, hastening the downfall of both Silicon Valley Bank and Signature Bank and instigating financial instability in the market.
The Fed, which is scheduled to meet on March 21st, will have to weigh the pros of lowering inflation with the cons of further inflaming a volatile economic atmosphere.
“I think given the events that we’ve seen in recent days, [more rate hikes] look less and less like realistic outcomes,” Knightley said. “Financial stability always trumps near-term inflation fears and lagging indicators like retail sales.”