Retail sales start the year sharply lower
The consumer had remained defiant in the face of elevated inflation.
February 15, 2024
The consumer buckled at the start of the new year. January retail sales fell 0.8%, a much steeper fall than the -0.2% consensus estimate. January’s drop was the biggest decline in nearly a year, since March 2023’s -0.9%. December retail sales were revised lower to +0.4% from the +0.6% originally reported.
A 1.7% drop in sales for motor vehicles and parts dealers was the main driver behind the weakness in retail sales. Gasoline station sales fell 1.7% due to a 3.3% drop in gasoline prices as reported in this week’s consumer price index (CPI) report. On an inflation-adjusted basis, those sales actually rose.
What was not expected from the retail sales data was a 4.1% plunge in building materials store sales, the largest drop since pre-COVID, when they declined 4.4% in February 2019. The housing sector had shown some signs of life when mortgage rates recently fell below 7%. This category should pick up as we move into the spring selling season for the housing market. Another housing related category, furniture store sales, held up better. It rose 1.5%, providing a modest offset.
Even online sales broke lower, falling 0.8% in January after rising by 1.4% in December. Other areas of weakness in the January report included health and personal care store sales, -1.1%, clothing and sporting goods stores, each down 0.2%, and general merchandise stores that were flat.
While goods consumption declined in January, consumers continued to frequent eating and drinking establishments. Those sales rose 0.7%, continuing a stretch of gains for nearly a year now. Travel and tourism remained strong in January, which showed up as an increase among those out on vacation in the January employment report. Businesses are also starting to step out more and compete with weddings for popular venues.
Core retail sales, which feed into the calculation of GDP, fell 0.4% after rising 0.8% in December. That was the first decline in 10 months and compares with a consensus expectation of 0.2%. The outcome will shave a tenth or two from our projection for consumer spending and GDP growth in the first quarter. Other data to date has been stronger, which keeps our forecast of close to 2% for first quarter growth. Look for some downward revision to the fourth quarter of 2023.
There are no signs yet of a collapse in consumer spending.
Ken Kim, KPMG Senior Economist
Bottom Line
For some time, the consumer had remained defiant in the face of elevated inflation. In January, the rate of inflation nudged higher, instead of lower, according to the CPI report. The weakness in January retail sales combines with our view that consumer spending will moderate. There are no signs yet of a collapse in consumer spending. The largest risk to underlying consumer demand is the labor market and whether we can continue to see employment gains as the Federal Reserve holds rate higher for longer. We don't expect major losses but that is contingent on less interest rate sensitive sectors continuing to fuel employment gains. Today's initial unemployment claims suggest the labor market remains resilient.
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