Americans significantly increased their spending on cars, electronics, and dining out last month, showing resilience even as a clearer picture emerged of how much they had tightened their belts earlier this winter.
The advance retail sales numbers released Thursday by the Commerce Department revealed a solid 0.6% rise, although slightly less than expected, while the January numbers were adjusted down to a negative 1.1%. Cold weather and one-off factors were blamed for dragging January sales.
“It’s looking like the consumer remains resilient,” said Oscar Munoz, an economist at TD Securities.
The retail spending numbers include goods, but not most services, which account for two-thirds of consumer spending.
“What remains resilient, as far as we can tell, is the service side of the spending as well,” said Jay Bryson, chief economist at Wells Fargo Bank.
Restaurant sales, the only service reflected in this report, were up 0.4% while spending at grocery stores slipped by 0.1%. Restaurants are a key indicator of confidence because they are mostly discretionary spending. Consumers must feel confident in their income and future financial stability to splurge on dinner and drinks instead of eating at home.
The latest reports on spending on services, in January, remained strong and more than compensated for the weak retail sales that month.
Overall, retail sales are up 0.8% over February 2023 and the core group, which excludes automotive and gas, is up 2.3% over last year.
Consumers spent less on furniture ( down 1.1%), clothing ( down 0.5%), and health and personal items (down 0.3%).
The overall gains in spending were driven in part by strong auto and gasoline sales, up 1.8% and 0.9% respectively, which rebounded from a particularly weak January.
Gas spending is driven by commodity prices and doesn’t reflect increased purchase amounts. The average gas price was $3.412 on Thursday, up from $3.256 a month ago, according to the AAA.
For big-tab items like vehicles that require financing, inflation may be taking a toll. But the strong labor market – the economy added 275,000 jobs in February, beating expectations – is simultaneously giving consumers income and confidence.
“There’s two cross-currents here,” Bryson said. “It’s more expensive to finance a car, but you also have more money to spend.”
John Wagner, a service adviser at an auto shop, and his wife, a registered nurse, both bought new vehicles in February.
He got a 2024 white Toyota Tundra, a model he had been eyeing for months but found that dealers were asking $10,000 above the manufacturer's suggested retail price. Finally, he found one at a local dealer in Fargo that was at the suggested retail price and he snapped it up.
After spending all that time at the dealership securing his Toyota, his wife noticed a new SUV that looked much more comfortable than her old Jeep Wrangler. A week later, she was driving off in her grey 2024 Toyota Forerunner.
“I got what I wanted and she got what she wanted,” Wagner said.
Although consumer spending is a main driver of economic growth, the impact of any decision by the Federal Reserve on interest rates is unclear.
When combined with the latest data showing inflation inching up, the retail sales numbers won’t likely push a decision either way. The higher inflation would be an indicator to keep the rates high, while the spending would encourage lowering the rate.
The result is too mixed to have an impact, although economists expect the Federal Reserve to keep the interest rates the same at its meeting next week.
“It seems like any kind of Fed easing will be later than people thought even a few months ago,” Bryson said, indicating that it may be this summer before interest rates come down.