By Lucia Mutikani
WASHINGTON (Reuters) -U.S. retail sales dropped by the most in nearly two years in January, likely weighed down by frigid temperatures, wildfires and motor vehicle shortages, suggesting a sharp slowdown in economic growth early in the first quarter.
But the larger-than-expected and across the board decline in retail sales reported by the Commerce Department on Friday probably does not reflect a material shift in consumer spending as it also followed four straight months of hefty increases.
A sharp upward revision to December’s sales took some of the sting from the report. Economists also noted that it was difficult to strip out large seasonal swings from the data at the turn of the year, which was also evident in the January consumer inflation report.
They continued to expect the Federal Reserve would not resume cutting interest rates before the second half. Some of the policies of President Donald Trump’s administration, like broad tariffs on imports, have cast a shadow over the economy.
“The drop was dramatic, but several mitigating factors show there’s no cause for alarm,” said Robert Frick, corporate economist at Navy Federal Credit Union.
Retail sales dropped 0.9% last month, the biggest decrease since March 2023, after an upwardly revised 0.7% increase in December, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, dipping 0.1%. Retail sales increased 4.2% year-on-year in January.
Much of the country was blanketed by snowstorms and freezing temperatures last month while wildfires scorched entire neighborhoods in Los Angeles.
“The wildfires in Los Angeles, the second-largest metro area in the U.S., and severe winter weather in other parts of the country, may have limited face-to-face shopping activity,” said Jay Hawkins, a senior economist at PNC Financial.
Some economists speculated that rising prices and confusion over tariffs could have impacted sales.
Pre-emptive buying in anticipation of tariffs that would raise prices for goods helped to boost retail sales in recent months. But consumer sentiment has deteriorated, with one-year inflation expectations hitting a 15-month high in early February as households perceived that “it may be too late to avoid the negative impact of tariff policy,” a University of Michigan survey of consumers showed last week.
“Maybe people are getting confused on the tariff story and think they are happening immediately and are therefore not even considering a purchase,” said James Knightley, chief international economist at ING.
“We will need to wait until the February data to see if this is the start of a more cautious consumer trend or indeed whether it was simply a weather-related pull back.”
A 25% tariff on Mexican and Canadian goods was delayed until March. An additional 10% levy on goods from China went into effect this month. Trump this week tasked his economics team with devising plans for reciprocal tariffs on every country that taxes U.S. imports.
Stocks on Wall Street were muted on Friday, while the dollar eased against a basket of currencies and U.S. Treasury yields fell.
FED ON HOLD
The data did little to change the view that the Fed will wait until later in the year to next cut its policy rate.
The U.S. central bank left its benchmark overnight interest rate unchanged in the 4.25%-4.50% range in January, having reduced it by 100 basis points since September, when it embarked on its policy easing cycle. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.
Within the retail sales figures motor vehicles led the decline, with receipts at auto dealerships dropping 2.8% after advancing 0.9% in December. In addition to the weather probably keeping buyers from showrooms, shortages could have been a factor.
Other data from the Census Bureau showed retail motor vehicle inventories were depleted in December. Supply is unlikely to improve, with a third report from the Fed showing motor vehicle production plummeting 5.2% in January.
Sporting goods, hobby, musical instrument and bookstore sales plunged 4.6%. Online store sales tumbled 1.9%. Building material store sales fell 1.3%. There were also sharp declines in sales at furniture, clothing and electronic retailers.
But receipts at food services and drinking places, the only services component in the report, increased 0.9% after edging up 0.1% in December. Economists view dining out as a key indicator of household finances. Higher gasoline prices lifted sales at service stations 0.9%.
Spending remains underpinned by labor market resilience, which is keeping wage growth elevated and the economic expansion on track. Household wealth is at record highs thanks to high house prices, though the stock market has ceded some gains.
Retail sales excluding automobiles, gasoline, building materials and food services declined 0.8% last month after an upwardly revised 0.8% jump in December.
These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product, and were previously reported to have surged 0.7% in December.
Economists estimated inflation-adjusted consumer spending to have been flat or have posted a small dip in January. Robust consumer spending offset the drag on GDP from inventories being nearly drawn down in the fourth quarter.
The Atlanta Fed lowered its first quarter GDP growth estimate to a 2.3% annualized rate from a 2.9% pace. The economy grew at a 2.3% rate last quarter.
“The underlying strength of the economy remains largely unchanged,” said Tuan Nguyen, U.S. economist at RSM US. “If that strength persists, we should expect sales to rebound in the coming months.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Toby Chopra)
