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Unraveling the mystery of January's US retail sales plunge

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2024-02-16

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Now here’s something requiring a bit of counterintuitive thinking: Did US retail sales really fall as much as reported by the government, or were there factors that added to a bit of weakness after solid rises in the closing months of 2023?

US retail sales fell 0.8% in January from December — the biggest monthly drop in 10 months, with pullbacks reported at most retail shops, except restaurants, where spending jumped 0.7%.

December’s sales were revised down to 0.4% from the originally reported 0.6%.

Excluding sales of autos, gas, building materials, and restaurant meals, the so-called control group of sales — which is used to calculate economic growth — fell 0.4% in January. Economists had expected an increase.

But the US saw winter storms across much of the Midwest, South, and Northeast, while parts of California saw several winter rainstorms.

The question for economists is whether the poor weather was enough to impact retail sales.

The data suggests it was.

Spending declined across various categories last month, including at gas stations and home improvement stores, likely due to the winter storms, falling 1.7% and 4.1%, respectively. Online sales contracted 0.8% with the weather causing delivery delays in some areas.

Reuters also pointed out there are continuing difficulties with the seasonal adjustment factors at the start of a year. “Economic data is generally difficult to seasonally adjust at the start of the year, a process that has also been made difficult by distortions caused by the COVID-19 pandemic.

"One-off factors including shifting seasonal adjustment dynamics and the unusually harsh winter weather likely help explain the disappointing performance," EY-Parthenon economist Lydia Boussour wrote.

And "Retail sales in January declined sharply, however, revised seasonal factors and inclement weather exaggerated the degree of the slowing in spending following the holiday spending spree," Kathy Bostjancic, chief economist at Nationwide, told Reuters.

The data shows January’s drop was widespread as shoppers cut back their spending in nine of 13 categories in the statistical series. These included clothing and accessory stores, health and personal care businesses. Many of these stores are in malls that require consumers to drive, walk, or catch public transport which were impacted by the bad weather.

Sales at building materials and garden suppliers fell a steep 4.1%, reflecting bad weather. Online sales fell 0.8%.

But economists say the solid gain at restaurants showed that spending at services remains sturdy, analysts said.

Consumers hurting from rate rises or weak personal income do not lift spending outside the home - if anything, the trend reported by major food suppliers is that there was more home eating in the December quarter.

And if, as many analysts and economists claimed, the fall represented the impact of higher interest rates, how come that didn’t impact employment - new jobs were up 353,000 in January (with some impact from the weather in parts of the country, especially construction, mining, and quarrying).

(The freezing weather also impacted production with output falling 0.5% in January, according to a separate report from the Federal Reserve showed on Thursday. Manufacturing production had edged up 0.1% in December)

And the latest initial unemployment benefits claims showed a surprise fall of 8,000 to a very low 212,000 last week. 220,000 new claims were forecast, but economists were surprised at the fall given the tens of thousands of jobs cut by tech companies, media groups (especially newspapers and TV)

Major retailers including Walmart, Home Depot, and department store chains Dillard's and Macy’s are due to report financial results for the fiscal fourth quarter, which includes the critical holiday period, starting next week.

Walmart though will report its 4th quarter and full financial year figures (to the end of January) on Tuesday (February 20), which will flesh out just what happened to US retail spending last month.

Given the uncertainty with the key consumption figures, it’s surprising a lot of commentary talked about downgrading first-quarter economic growth and how this could see the Fed start cutting rates earlier than expected.

Why, with the uncertainty about just what happened to the US economy in January, would the Fed want to start cutting rates when it's unclear just what went on because of the weather (which is now warmer than expected and why natural gas prices have collapsed in February)?

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