American consumers pulled back on spending in January, with retail sales declining 0.9%, according to the Commerce Department’s report on Friday.
The drop follows an upwardly revised 0.7% gain in December and exceeded the expected 0.2% dip.
Adjusted for seasonal fluctuations but not inflation, the data suggests economic growth may be cooling as prices continue to rise.
Excluding auto sales, retail receipts fell 0.4%, missing expectations for a slight increase. A key “control” measure, used to gauge consumer-driven GDP growth, declined 0.8%, reversing the previous month’s upwardly revised 0.8% increase.
With consumer spending accounting for about two-thirds of U.S. economic activity, these figures point to a slower start to the first quarter.
Declines were broad-based. Sporting goods, music, and bookstores reported a steep 4.6% monthly drop, while online sales fell 1.9%.
Vehicle and auto parts sales slid 2.8%, retreating from December’s dealer-driven surge. Meanwhile, gas stations and food establishments posted 0.9% gains, supported by rising fuel prices and resilient dining demand.
Market reaction remained cautious. Stock futures held slightly negative, while Treasury yields softened. Traders increased bets that the Federal Reserve could cut interest rates as soon as June.
The drop was dramatic, but several mitigating factors show there is no cause for alarm. Some of it can be attributed to poor weather and an auto sales slowdown after December’s spike due to strong dealer incentives.
Especially considering December was revised up, the rolling average of consumer spending remains stable.
Inflation remains above the Fed’s 2% target. The consumer price index increased 0.5% in January, marking a 3% annual rise.
However, wholesale prices, measured through the producer price index, showed some softening in key supply chain costs.
In a related report, the Bureau of Labor Statistics noted that import prices increased 0.3% in January, the biggest one-month rise since April 2024.
On a year-over-year basis, import prices rose 1.9%, with fuel prices climbing 3.2%, the largest increase in nearly a year.
Food, feed, and beverage costs edged up 0.2% after December’s 3% spike. Export prices also moved higher, increasing 1.3%.
With economic crosswinds strengthening—rising inflation on one side, softening retail demand on the other—the coming months may shape the Fed’s next move.
Whether January’s spending slump signals a genuine slowdown or a seasonal fluctuation remains to be seen. The business sector will be closely watching consumer trends to assess potential impacts on growth.
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