March 15, 2023

Consumer Spending Is Challenged by High Inflation as Retail Sales Fall

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The value of overall retail purchases decreased 0.4% after a revised 3.2% advance in January, Commerce Department data showed Wednesday. Excluding gasoline and autos, retail sales were flat. The figures aren’t adjusted for inflation.

The median estimate in a Bloomberg survey of economists expected the total retail sales figure to fall 0.4%.

Eight out of 13 retail categories fell last month, led by furniture and department stores. The report showed vehicle sales declined 1.8% in February. The value of sales at gasoline stations decreased 0.6%, likely reflecting lower prices in the month.

Sales at restaurants and bars — the only service-sector category in the report — fell 2.2% in February, the most in over a year.

The data point to consumer demand that’s starting to feel the weight of persistent inflation and the Federal Reserve’s interest-rate increases. While a resilient labor market has allowed many Americans to keep spending, others are relying on credits cards and having a harder time making ends meet.

Read more: Retailers Fear High-Flying US Consumers Are Sinking

What Bloomberg Economics Says...

“Beyond the headline there’s evidence of consumer resilience, and this report will do little to alter the Fed’s understanding of the macroeconomy. February’s print allows the Fed to maintain its hiking path and keeps a 25-basis-point hike in play for the March 21-22 FOMC meeting.”

— Stuart Paul, economist

To read the full note, click here

That said, it can be difficult to draw concrete conclusions from the retail sales report as the data aren’t adjusted for inflation and mostly only capture spending on goods. A separate report on February household demand that includes price-adjusted goods and services spending is due later this month.

The consumer price index report on Tuesday showed inflation remained broad-based last month — including in many goods categories like household furnishings and apparel — complicating matters for the Fed as it weighs how much to raise interest rates next week. The central bank will also have to contend with the evolving financial distress in the aftermath of the collapse of Silicon Valley Bank.

How Executives See It

  • “The economy continues to be — to appear pretty healthy given the consumer spending. So consumers — our elasticities generally as well have been a bit more moderated than we would have expected.” — Mark Smucker, J.M. Smucker Co. CEO, at March 14 conference
  • “Strong consumer demand and outstanding execution by our teams fueled broad-based strength across our business.” — Dave Kimbell, Ulta Beauty Inc. CEO, on March 9 earnings call
  • “It really is a combination of great marketing support, the right innovation and then a supply chain that’s stepping up to meet that growing and expanding demand.” — Mark A. Clouse, Campbell Soup Co. CEO, on March 8 earnings call

Separate data out Wednesday showed US producer prices unexpectedly declined in February, pointing to an easing of cost pressures. The Fed will consider all these figures, as well as additional data on housing, manufacturing and consumer inflation expectations during its next policy meeting on March 21-22.

So-called control group sales — which are used to calculate gross domestic product and exclude food services, auto dealers, building materials stores and gasoline stations — rose 0.5%. That suggests household spending will rise at a “solid pace” in the first quarter, said Rubeela Farooqi, chief US economist at High Frequency Economics.

“Even as higher borrowing costs and elevated prices are a constraint for consumers, pent-up demand, a still-strong labor market and gradually easing inflation appear to be supporting household spending,” Farooqi said in a note.

“However, as the labor market softens in response to restrictive monetary policy, consumer attitudes are likely to turn more cautious over time.”

--With assistance from Jordan Yadoo.

(Adds Bloomberg Economics comment. An earlier version was corrected to show eight categories fell)

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