Retail sales dropped for the second month in a row in March as demand for goods and food services continued to ease, suggesting the end of the business cycle.
If interest rate increases take six to 12 months to be felt in the economy—the accepted wisdom before the pandemic—then it is likely that after a year of aggressive rate increases by the Federal Reserve, we have passed or are nearing the peak of the spending cycle.
Because retail sales data covers mostly goods, as opposed to services, we will need more information on services spending to call the end of the cycle.
On top of that, excess savings, which bolstered consumer spending during the recovery from the pandemic, have been drawn down significantly in the past year and a half. That should set the stage for a recession in the second half of the year as we have predicted.
The sales number, calculated in dollar terms, came in lower than expected, plunging by 1% in March, according to Commerce Department data released on Friday. One big factor was the drop in goods prices that make up most of the retail sales data.
Commodity prices excluding food dropped by 0.5% in March according to the consumer price index report last week. After adjusting for price declines, sales volume most likely fell by 0.4%, according to our estimate.
The control group that feeds into the calculation of gross domestic product dropped by 0.3% on the month in dollar terms. It is unclear whether after adjusting for inflation the sales volume remained in negative territory or not. Our preliminary estimate pointed to a modest gain in sales volume for the control group at 0.1%.
Still, the slowdown in control group spending should add more downside risk to our GDP forecast for the first quarter, which was at 1.4% before the release.
Inside the data, spending on gasoline led the decline at 5.5% on the month, driven mostly by a sharp drop in gasoline prices. General merchandise, building materials, electronics and auto sales also posted significant declines at 3%, 2.1%, 2.1% and 1.6%, respectively.
Online and health care sales were two of the few categories that increased on the month, rising by 1.9% and 0.3%, respectively.
The takeaway
While inflation remains a concern, we expect that talk of a recession and how to prepare for one will become more common in the next couple of months. That should further add to the many reasons that move the Fed to pause its interest rate increases this summer.
