Retail sales declined for the fourth time in five months

Retail sales were surprisingly soft in March, falling by 1.0% over the prior month — a much weaker result than the consensus forecast for a more muted 0.4% decline. Retail sales have declined in four of the last five months, with the lone exception being a sharp gain in January — the strongest single-month increase since March 2021.

The underlying story, however, may not be as negative as the headline number suggests. Despite the pullback, retail sales rose by about 1.8% in the first three months of the year — the strongest quarterly advance since Q2 2022.

It’s important to note that unlike the GDP report, retail sales are reported in nominal terms. That fact played a significant role in explaining the magnitude of the decline in sales. Gas station sales plunged by 5.5% last month, reflecting a modest decline in demand, but more notably a 4.6% drop in the average cost for a gallon of gas. Over the past year, gas station sales have fallen by over 14% as global energy prices have eased. That’s clearly good news for consumers, providing a bit more breathing room in household budgets and potential fuel for discretionary spending.

Excluding gas stations, retail sales still declined by 0.6%, which suggests that consumers are feeling the effects of an extended period of rising prices and are paring back.

Also of note was weakness in spending on bigger-ticket items for which consumers are more likely to lean on credit. Higher interest rates are a headwind to such purchases, as best illustrated by the 1.5% decline in car sales. Weaker results in furniture and electronics may be somewhat attributable to that as well.

Even so, the weakness extends beyond gasoline and durable goods. General merchandise stores and apparel retailers felt the pinch with sales falling more sharply than the broad retail sector.

What does it mean? In part, the trend illustrates the broad slowdown in the economy that’s readily apparent in other data as well. It’s exacerbated by the ongoing trend toward greater household spending on services at the margins rather than goods. Many households spent vigorously on tangible goods when COVID-19 concerns curtailed travel and kept most Americans close to home. That’s clearly changed with greater mobility and a return to a more normal environment.

Another underlying concern is how consumers are funding their spending habits. Although many households are still sitting on more cash than they had coming into 2020, surging consumer credit suggests that many households have been tapping credit cards to fuel their spending. The recent slump in retail activity may be bringing that to light as consumers are either more unwilling or less able to rack up further credit card debt, particularly as interest rates continue to climb.

The bottom line? The days of brisk spending on tangible goods are firmly in the rearview mirror. Will inflation normalize rapidly enough to provide a boost in the near term? Or will households retrench more notably as their savings dwindle, their available credit diminishes, and prices continue to rise? The answer to those questions will likely be the lynchpin to the soft landing versus recession debate. If the economy is to avoid a recession, consumers will need to find their second wind.