Consumer Spending Wobbles
February’s disappointing retail sales data, released yesterday, has heightened concerns about the health of the US consumer—a key driver of the economy. Retail sales fell short of expectations, and January’s figures were revised down to their lowest level since July 2021. Combined with declines in New York manufacturing activity and homebuilder sentiment, the outlook for US economic growth appears increasingly fragile.
Notably, the retail figures are not adjusted for inflation and primarily reflect goods purchased. A clearer picture will emerge later this month when inflation-adjusted data on goods and services spending is released.
More than half of retail categories saw declines, including vehicles, gasoline, apparel, and electronics. Restaurant spending also suffered its sharpest drop in a year. Several major retailers have voiced concerns over weakening consumer demand, with some suggesting that many customers can only afford basic necessities, while others struggle to make purchases throughout the month.
However, the retail sales control group—which excludes auto dealers, building materials, gas stations, office supply stores, mobile home dealers, and tobacco stores—unexpectedly rose by 1%. This measure, which feeds into GDP calculations, is seen as a more accurate indicator of consumer spending. Some analysts suggest the February uptick may be due to seasonal adjustments rather than a genuine increase in spending.
The Atlanta Fed’s real GDPNow estimate for Q1 2025 growth was upgraded slightly to -2.1%. According to Pat Higgins, creator of the GDPNow model, removing gold from import and export calculations increases both the overall growth forecast and the net export contribution by approximately 2%. Adjusting for this, the GDPNow model suggests a worst-case scenario of a 0.4% contraction in the first quarter. However, broader forecasts vary considerably in light of the new US administration’s policy whiplash.
The latest data underscores the challenges facing the US economy, as consumer spending remains uncertain amid inflationary pressures and economic headwinds. The coming weeks will provide further clarity on the trajectory of growth as additional data is released.
Against this backdrop, the Federal Reserve faces a difficult task in setting interest rate policy at this week’s meeting. With mixed economic signals and entrenched inflation, the Fed will need to carefully balance the risks of maintaining restrictive policy against the potential for slowing growth. The central bank is widely expected to hold rates steady at tomorrow’s meeting, while markets will closely watch for any signals on future policy direction.
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