Americans pulled back spending sharply in January following the holiday shopping season. Retail sales fell 0.8%, a bigger drop than the 0.1% decline experts predicted.
Excluding autos and gas, sales slid 0.5%. That’s the lowest such figure since March 2022.
The report indicates shoppers are cutting discretionary purchases due to high prices and interest rates.
“Real consumption appears to have declined in January and, even allowing for a recovery over February and March, growth will slow sharply in the first quarter,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote in a report.
Hunter’s analysis suggests that the Federal Reserve may soon begin cutting interest rates.
Indeed, inflation cooled to 3.1% annually in January from 9.1% in summer 2022, although it remains above the Fed’s target of 2%. Meanwhile, employers have been adding hundreds of thousands of jobs per month thanks to persistent labor demand.
However, last month’s bad weather came with declines across industries including clothing, healthcare, and building materials. Shoppers continued frequenting restaurants, underscoring spending on services.
Major chains like Walmart and Macy’s report holiday quarter earnings next week, offering clues on consumer patterns. Some food giants, like Kraft-Heinz have noted customers traded down to more affordable brands recently amid stretched budgets.
Stillz sales of beauty products have boomed after the pandemic, according to the report. E.L.F. Beauty CEO Tarang Amin attributes the gangbusters sales to the popularity of self-care, and The cosmetics company just raised projections thanks to strong holiday momentum.
While beauty shines, big agencies will assess whether January’s surprise consumption contraction proves temporary or foreshadows further slowing. Lower rates could provide relief.
Still, muted retail demand shows households’ caution at the end of 2023.
The Associated Press contributed to this article.