The Commerce Department reported Thursday that consumer spending fell sharply in January, representing a potential early danger sign for the economy.
Advance retail sales fell 0.8% during the month after rising downwardly revised 0.4% in December, according to the Census Bureau. The decline was expected: Economists surveyed by Dow Jones were looking for a 0.3% decline, partly to offset seasonal distortions that may have boosted December numbers.
However, the decline was much larger than expected. Even excluding cars, sales fell 0.6%, well below estimates of a 0.2% increase.
The sales report was adjusted for seasonal factors but not for inflation, so the release showed spending lagging the pace of price increases. On an annual basis, sales increased by only 0.6%.
The Labor Department reported Tuesday that headline inflation rose 0.3% in January and 0.4% excluding food and energy prices. On an annual basis, the readings reached 3.1% and 3.9%, respectively.
Sales at building and garden supply stores were particularly weak, falling 4.1%. Miscellaneous store sales fell 3% and auto parts retailers saw a 1.7% decline. Gas station sales also decreased by 1.7% as prices at gas stations decreased during the month. On the upside, restaurants and bars recorded a 0.7% increase.
The retail sales group, which excludes items such as food services, automobiles, gas and building materials, fell 0.4%. This number is entered directly into the Ministry of Commerce's calculations of GDP.
Consumer power has been at the heart of the US growth picture, which has proven to be far more sustainable than most policymakers and economists expected. Spending accelerated by 2.8% in the fourth quarter of 2023, ending a year in which gross domestic product rose 2.5% despite widespread expectations of a recession.
However, concerns remain that stubbornly high inflation could take its toll and jeopardize future prospects.
“It's a weak report, but it's not a fundamental shift in consumer spending,” said Robert Frick, corporate economist at Marine Federal Credit Union. “December was up due to holiday shopping, and January saw a decline in these spending categories, combined with cold weather as well as an unfavorable seasonal adjustment. Consumer spending likely won't be great this year, but with real wage gains and increased hiring, it should “It will go a long way to helping keep the economy expanding.”
A separate economic report on Thursday showed continued strength in the labor market, another cornerstone of the economic picture.
The Labor Department reported initial claims for unemployment insurance totaled 212,000 for the week ending February 10, down 8,000 from the previous week's upwardly revised total and below the estimate of 220,000.
Continuing claims, which were delayed by a week, totaled just under 1.9 million, up 30,000 over the week and above the estimate of 1.88 million.
There was also some good news on the manufacturing front, with regional surveys in the Fed's Philadelphia and New York regions coming in better than expected for February.
The Philadelphia poll showed a reading of 5.2, up 16 points and better than the estimate of -8, while the Empire State survey of New York was -2.4. Although the New York survey still indicated contraction, it was a much better reading than the January reading of -43.7 and -15. The surveys measure the share of companies reporting growth, so a positive reading indicates expansion.
The reports were largely received by markets, with stock futures pointing to a higher open on Wall Street.
Investors are closely watching the numbers for clues about the direction the Fed will take with regard to monetary policy and interest rates.
Fed officials have said they are satisfied enough with the prospects for lower inflation and flat growth that the cycle of rate hikes that began in March 2022 is likely to end. But they are watching the data closely, with most saying they will need more evidence that inflation is on track. A sustainable path back to the central bank's 2% target before tapering begins.
Futures market prices suggest the first rate cut will occur in June, with the Fed moving four times, or a full percentage point, by the end of 2024.
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