Soft top-line and underlying core retail sales in February point to persistent weak household spending in the first quarter of the year. While retail sales make up roughly 23 percent of household spending, we are certain that if personal spending in February and March does not surge at least 0.5 percent in each month that overall household spending will arrive below 1 percent on the month, dragging down GDP through the first three months of the year. Forward-looking investors and policymakers should begin preparing for a possible zero handle on growth in the first quarter of the year.
The retail growth picture arrived well below consensus, with the top-line sales falling 0.2 percent, core spending excluding autos and gasoline down 0.6 percent, and the control group down 0.21 percent. The silver lining in the dark cloud that was the February retail sales report was the upward revision to the January top line from 0.2 percent growth to 0.7 percent and the control group from 1.1 percent to 1.7 percent.
Following the January retail sales report we noted that there was little to validate that December softness was a one-time affair. The February data validates this and the three-month average annualized pace of spending implies the U.S. household is engaged in more than just the traditional holiday spending hangover, despite relatively solid job and wage gains.
We normally do not make much of the month-to-month variation in the top line data and prefer to smooth out the noise by looking at the three-month average annualized pace to gain insight into the underlying growth trend in retail. Even with the solid upward revision to the January data, the trend is not constructive. Top-line sales declined 3.5 percent using that metric, core sales fell 1.3 percent and the control group that feeds into the calculation of GDP declined by 2.1 percent, underscoring our pessimistic outlook on growth for the first quarter of 2019.