Kiplinger Retail Outlook: January Spending Pause Was Likely Temporary

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Total retail and food service sales, excluding gasoline, grew by only 0.3% in February after a 1.4% drop in January, likely due to winter storms. The details of the monthly report were a bit better than the headline figure looked at first, though. Motor vehicle sales had been expected to drop from unusually high levels in November and December, as consumers rushed to buy before expected price increases caused by new tariffs. However, if you exclude motor-vehicle, gasoline and food-service sales over the past two months, February saw sales bounce back by 0.9% from a less severe January dip of 1.0%. It’s possible that a winter storm across the South in February prevented a fuller recovery, but even if so, it is concerning that consumer spending was flat, on average. Health, personal-care and grocery stores did well, but clothing, electronics and appliance stores saw consecutive monthly declines. E-commerce sales rebounded and completely reversed their January losses, at least.

Also concerning was a large 1.5% drop in food service sales in February, the biggest in two years. Eating out is often one of the first discretionary items to suffer when consumers pull back. Spending on other services, excluding dining, rose a smallish, storm-affected 0.3% in January after a strong December. (January is the latest month for which services spending data other than dining are available.) Spending on services had been pretty consistent, with 0.5% to 0.6% increases in eight of the previous 10 months.

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Consumer spending growth will likely slow this year, for multiple reasons: Income growth is flattening since hiring is declining; the stock market has reversed course for the moment, making some consumers worry more about their finances; and tariffs plus layoffs of federal workers and contract terminations will create ripple effects and economic uncertainty for consumers and businesses alike. Preliminary consumer sentiment for March is showing a sharp drop again, though mostly among Democrats and independents, and not so much among Republicans. Finally, even if the unemployment rate does not rise much, fears of job losses will likely boost the household savings rate to 6%, from below 4% late last year. More saving means less spending on current consumption: A prudent move for individual consumers during times of uncertainty, but a headwind for the overall economy.

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