Consumer spending fell sharply in January, a possible early sign of danger for the economy, the Commerce Department said Thursday.
Retail pre-sales fell 0.8% this month, after a downwardly revised 0.4% increase in December, the Census Bureau said. A decline had been expected: economists polled by Dow Jones expected a decline of 0.3%, partly to offset seasonal distortions that likely led to a rise in December figures.
However, the decline was considerably greater than expected. Even excluding cars, sales fell 0.6%, well below the estimate of a 0.2% gain.
The sales report was adjusted for seasonal factors, but not inflation, so the release showed that spending lagged the pace of price increases. On an annual basis, sales increased by only 0.6%.
Headline inflation rose 0.3% in January and 0.4% if food and energy prices are excluded, the Labor Ministry said on Tuesday. On an annual basis, the two figures were 3.1% and 3.9% respectively.
Turnover at building materials and garden stores was particularly weak and fell by 4.1%. Sales at various stores fell 3% and auto parts and retailers saw a decline of 1.7%. Gas station sales also fell 1.7% as prices at the pump fell over the month. On the plus side, restaurants and bars reported a 0.7% increase.
The retail sales control group, which excludes items such as food service, autos, gasoline and building materials, fell 0.4%. The number is used directly in the Commerce Department's calculations for gross domestic product.
The power of the consumer has been central to the American growth picture that has proven far more sustainable than most policymakers and economists expected. Spending accelerated 2.8% in the fourth quarter of 2023, capping a year in which gross domestic product rose 2.5% despite widespread predictions of a recession.
However, concerns remain that persistently high inflation could take its toll and jeopardize future prospects.
“It's a weak report, but not a fundamental shift in consumer spending,” said Robert Frick, a business economist at Navy Federal Credit Union. “December was high due to Christmas shopping, and January saw declines in these spending categories, plus freezing weather plus an unfavorable seasonal adjustment. Consumer spending is unlikely to be great this year, but with real wage gains and rising employment, it should be plenty. ” to grow the economy.”
A separate economic report on Thursday showed continued strength in the labor market, another critical basis for the economic picture.
Initial unemployment insurance claims totaled 212,000 for the week ended Feb. 10, down 8,000 from the previous week's upwardly revised total and below the estimate of 220,000, the Department of Labor reported.
Continuing claims, which lag a week, totaled just under 1.9 million, up 30,000 on the week and higher than the estimate of 1.88 million.
There was also good news on the manufacturing front, as regional surveys in the Federal Reserve's Philadelphia and New York districts both came in better than expected for February.
The Philadelphia survey showed a score of 5.2, up 16 points and better than the estimate of -8, while the Empire State survey for New York was -2.4. While the New York survey still indicated a contraction, it was a much better outcome than January's estimates of -43.7 and -15. The surveys measure the share of companies reporting growth, so a positive outcome indicates expansion.
Markets largely followed the reports closely, with stock futures pointing to a higher open on Wall Street.
Investors are watching the data closely for clues as to which direction the Fed will move on monetary policy and interest rates.
Federal Reserve officials have said they are so pleased with the prospects for both falling inflation and stable growth that the cycle of rate hikes that began in March 2022 is likely over. But they are watching the numbers closely, with most saying they will need more evidence that inflation is on a sustainable path back to the central bank's 2% target before they start cutting.
Futures market pricing indicates the first rate cut will come in June, with the Fed moving a total of four times, or a full percentage point, by the end of 2024.
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