Inflation, weak auto sales, and bad weather drive a sharp drop in US retail spending, shaking market outlook
US retail sales fell 0.9 percent in January, reversing the 0.7 percent gain recorded in December, according to a US Commerce Department report released on Friday, according to CNBC.
The decline was steeper than the Dow Jones estimate of a 0.2 percent drop, raising concerns about slowing economic growth in the US.
The sales figures, which are seasonally adjusted but not inflation-adjusted, came as US consumer prices rose 0.5 percent for the month. Excluding auto sales, retail spending in the US fell 0.4 percent, missing the forecasted 0.3 percent increase.
A control measure used in US gross domestic product (GDP) calculations, which removes several nonessential categories, dropped 0.8 percent after an upwardly revised 0.8 percent gain in December.
Since US consumer spending accounts for about two-thirds of US economic activity, the weaker retail figures indicate potential slower growth in the first quarter.
Sales declined across multiple US retail categories in January. Sporting goods, music, and book store sales saw the steepest drop, down 4.6 percent. Online retail spending in the US decreased 1.9 percent, while spending on US motor vehicles and parts fell 2.8 percent.
However, gas stations and food and beverage establishments both posted 0.9 percent gains.
Following the report, US stock market futures remained slightly negative, and US Treasury yields fell. Traders increased their expectations that the US Federal Reserve could cut interest rates as early as June.
Robert Frick, corporate economist at Navy Federal Credit Union, described the decline as notable but not alarming.
“The drop was dramatic, but several mitigating factors show there’s no cause for alarm. Some of it can be chalked up to bad weather, and some to auto sales tanking in January after an unusual surge in December due to fat dealer incentives,” he said.
He also pointed to the strong upward revision for December’s numbers, noting that the rolling average of US consumer spending remains stable.
US inflation continues to exceed the US Federal Reserve’s 2 percent target. The US consumer price index increased 0.5 percent in January, pushing the annual US inflation rate to 3 percent.
Meanwhile, the US producer price index, which tracks wholesale prices, indicated some easing in key input costs.
The US Bureau of Labor Statistics reported that US import prices rose 0.3 percent in January, the biggest one-month gain since April 2024, bringing the year-over-year increase to 1.9 percent.
US fuel prices surged 3.2 percent, also the highest monthly jump since April 2024. US food, feed, and beverage costs increased 0.2 percent following a 3 percent rise in December.
In response to falling sales, according to the Wall Street Journal, companies like Reynolds American, PepsiCo, Estée Lauder, and Clorox are modifying their product offerings and pricing strategies to better align with consumer demand.
Estée Lauder plans to innovate across its price tiers to attract new customers, while Clorox focuses on enhancing product value with more concentrated and stronger goods.
PepsiCo is experimenting with varying package sizes to appeal to shoppers' changing cash availability throughout the month.
Reynolds American is targeting low-income smokers with more affordable options.
These adjustments aim to address consumers' spending decisions, which are largely driven by perceived value.
Retailers like Target and Walmart are experiencing differing impacts from President Donald Trump's tariff policies. Target is more vulnerable due to its reliance on imported merchandise, such as apparel and housewares, which are susceptible to price increases from tariffs.
In contrast, Business Insider, Walmart primarily generates revenue from domestically sourced groceries, making it less exposed.
Walmart's superior scale and advanced supply chain also allow it to manage costs more efficiently, giving it a competitive edge as consumers seek budget-friendly options amidst rising prices.
Despite recent declines in retail sales, consumer sentiment has shown resilience. The University of Michigan Survey of Consumers reported an increase in its index from 71.8 in December to a preliminary reading of 73.2 in January.
Assessments of personal finances improved by approximately 5 percent, while the US economic outlook dipped 7 percent for the short term and 5 percent for the long term.
