Retail sales miss expectations

March 17, 2025

Retail and food service sales rose 0.2% in February, a sluggish result and an outcome that was considerably weaker relative to market expectations of a 0.6% increase. A hopeful bounce back from the prior month’s sharp decline did not materialize. Furthermore, January retail sales were revised lower to -1.2% from -0.9%.

Sales at motor vehicle and parts dealers fell 0.4%, another unexpected outcome as unit sales of vehicles to consumers increased in February. Light vehicle sales rose to a 16.0 million annualized selling pace in February from 15.5 million in January, which was by aided by replacement demand due to fires in California. Our contacts in the vehicle sector have seen some buying ahead of the expiration of tax credits for electric vehicles and recently announced tariffs. Fleet sales likely boosted the unit gains as the rise in unit sales did not show up in the retail sales data.

Department store sales plunged 1.7%, the largest percentage decline in nearly a year, as consumers become more cautious and price conscious. Department store sales are down 7.5% over the past 12 months. General merchandise stores sales rose 0.2%, which includes discounters, as households, even those that make over $100K, gravitate toward value. Online sales recovered in February, rising 2.4%, after falling by the same amount in February, another sign that department stores could face a difficult environment in 2025.

Recent confidence data show a sharp drop in sentiment across income levels. Financial strain among lower-income consumers has been apparent in recent data but our concerns are that upper income consumers may also be cutting back their spending. The U.S. equity market, a consistent source of wealth for upper income households, entered correction territory last week, falling 10% from its recent peak. Tariff uncertainty and concern about the outlook for the U.S. economy is weighing on consumers.

Consumers cut back on discretionary spending as sales at restaurants and bars fell 1.5% after no change in January. This is the largest drop for this category in just over a year. Restaurant and bar sales are down 8.5% on a three- month annualized basis. Sales at gasoline stations dropped 1.0%, with a 0.9% decline in gasoline prices almost fully accounting for the decline.

Sales at health and personal care stores rebounded 1.1% in February after falling 1.1% in January. Those out ill and unable to work remained extremely elevated in the February employment report, amid an unusually bad flu season.

Core retail sales, which excludes gasoline station, auto dealer and building material stores, and which feeds directly into the GDP calculations, rose 1% in February after a downward revised 1% decline in January. Those figures are consistent with our view that consumer spending will rise 1.9% on an annualized basis in the first quarter and real GDP will expand by 1%.