Consumers celebrated the new year by quietly closing their wallets. Perhaps the surprisingly poor retail sales results for January reflected a post-holiday spending season retrenchment, or perhaps it reflects a preference for spending on travel and entertainment, some of which isn’t captured in the retail data. Whatever the underlying cause, most retail sectors felt the impact of a consumer sector that simply wasn’t spending as much on what they had to sell.
The result was a 0.8% dip in sales in January — a much more pronounced decline than had been anticipated. The consensus forecast had called for a comparatively muted easing of 0.2%.
Lower gas prices played a role but only a modest one. Cheaper prices at the pump may hurt gas station results but can provide extra spending money for consumers to use elsewhere. That provided negligible benefit last month though; excluding gas stations didn’t move the needle on the overall percentage decline.
Some retail sectors posted better results, but they were few and far between. Furniture and furnishing stores posted a robust 1.5% gain for the month, partially offsetting a challenging year in which sales declined over 5%, compared to 2022. That was an outlier in relation to other goods-oriented retailers, which experienced flat-to-softer revenue to start the year. The fact that declining sales even extended into the nonstore retail channel, which is dominated by online commerce, is telling. The long-term tailwind of changing consumer spending has favored online retail and is likely to continue. Even so, the impact of consumer belt-tightening — even if only at the margins — was apparent there as well.
One noteworthy exception to lackluster sales activity in January was in restaurants, which posted a solid 0.7% advance and rose by 6.3% over the past year. Particularly against an otherwise weak retail backdrop, the solid advance there suggests that consumers may not be universally retrenching but are just a bit more selective in how they’re spending. That’s a trend that has been apparent in recent years, breathing life into the service sector that struggled to rebound in the early stage of the expansion. As social distancing gave way to increased gathering and restricted movement was replaced with an embrace of travel, consumers have replaced spending on goods with spending on experiences: travel, dining out, and other service-oriented businesses.
More broadly, consumption momentum has slowed considerably since 2021; that was to be expected as conditions normalized. Strong labor market conditions continue to fuel solid wage growth, providing a key source of fuel for household spending. Many households also still have more cash than they had going into 2020. They may not be eager to spend that stockpile down, but it will allow many households to save less month-to-month, providing a bit more juice for spending.
One cautionary note comes in the state of consumer credit, which has soared over the past few years. Lower-income households in particular have used credit cards to bridge the gap in their spending budget as prices for shelter, food, and fuel soared. Despite the considerable increase in outstanding credit card debt, total debt relative to total income across all consumers still looks manageable. However, the impact of greater credit card balances and higher interest rates will undoubtedly be felt more by those living paycheck to paycheck, increasingly crimping discretionary spending.
It’d be unwise to read too much into a single month of data, but the surprisingly weak January retail results are a reminder that there is a limit to how much even the famously resilient U.S. consumer sector can and will spend. Whether or not January is an aberration or a crack in the foundation of consumption remains to be seen.
The Fed has been working to cool demand, create some slack in the labor market, and bring inflation back into a manageable range — all without knocking the economy off track. It’s a tough assignment, and one that remains a work in progress. The much hoped-for soft landing will require consumers to continue to increase spending at a moderate pace. That didn’t happen in January. The question is whether that will be followed by two steps forward or is the start of a more prolonged slowdown in consumption. All eyes will be on consumption and retail data in the coming months for greater clarity on that critical underpinning for the economy.
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