Retail sales rebounded in February, showing that the sharp drop in January was likely more noise than trend, according to data from the Commerce Department on Thursday.
Overall spending at retail stores, restaurants and online remained solid.
Once the seasonal factors in January’s data faded away, overall spending at retail stores, restaurants and online remained solid as consumers continued to benefit from a strong labor market and growing incomes. The top-line sales number grew by 0.6% on the month, the biggest increase since September.
In a separate report from the Labor Department, initial claims—a proxy for layoffs—again came in below the pre-pandemic average last week, falling to 209,000 from 210,000 as the labor market continued to remain tight.
Read more of RSM’s insights on the economy and the middle market.
Even amid the overall strength of Thursday’s data, there were areas of softness. The retail sales figure came in lower than expected, and the control group—which excludes food services, gasoline, autos and building materials, and is a proxy for goods consumption inside the gross domestic product data—was unchanged on the month.
Similar softness is unlikely in services spending, though. Services spending is for the most part not captured by retail sales data, but it has shown strength in other economic data, which should support solid growth of the consumption component of GDP in the first quarter.
In addition, we think that there is room for retail sales and spending in general to grow further over the next six months, not only because of the strong labor market, but also because of the wealth effect created by the significant increase in the stock market.
Last year alone, the sharp rebound in equities contributed to an increase of roughly $900 billion in households’ stock wealth, or $288 billion in consumer spending, according to our estimates.
If we consider the spending multiplier effect, the total increase in spending would be much higher at $1.3 trillion. The multiplier effect often takes place with a six-to-12-month lag, adding to the reasons to expect solid spending growth in the first half of the year.
Inside the data
Sales growth was driven mainly by automobiles, building materials, and gasoline in February, rising by 1.6%, 2.2% and 0.9% on a dollar basis, respectively.
Sales at restaurants and drinking places also grew by 0.45% after falling for two straight months in December and January.
Only three out of 12 categories posted a decline: clothing, health care, and non-store, which fell by 0.5%, 0.3% and 0.1%, respectively.
The takeaway
It is less clear whether consumers will be able to splurge as much as they have in the second half of the year. The labor market is expected to cool materially and consumers’ excess savings built up during the pandemic should run out by then. That is why we think the Federal Reserve should begin to shift from fighting inflation toward bolstering growth by cutting rates in the second half of the year.
With inflation expected to run between 2% and 3% this year, and with inflation expectations remaining well-anchored, two to three cuts in the Fed’s policy rate would foster growth while still keeping inflation under control.
