- Retail Sales fall 1.0% in March; February drop trimmed
- Core Retail Sales Slip 0.3%; February unchanged
- Manufacturing output down 0.5%
- Import prices fall 0.6%; Down 4.6% YoY
WASHINGTON, April 14 (Reuters) – U.S. retail sales fell more-than-expected in March as consumers curtailed purchases of automobiles and other bulky items, suggesting the economy may have softened at the end of the first quarter on higher sales Ride lost interest.
Retail sales are likely to remain weak given the slowdown in the labor market. Slacking demand for goods is undercutting factory output, with other data on Friday showing manufacturing output fell last month. Still, the Federal Reserve is poised to hike rates again in May before June’s pause in the Federal Reserve’s fastest monetary tightening cycle since the 1980s.
“Households are clearly feeling the strain of rising interest rates and a prolonged period of high inflation, and are cutting spending to offset it,” said Ben Ayers, senior economist at Nationwide in Columbus, Ohio. “While job and income gains remain strong, cracks in the consumer sector are widening and a negative shift in hiring activity could be the final blow to plunge the economy into recession.”
Retail sales fell 1.0% last month, the Commerce Department said. Data for February has been revised upwards to show retail sales fell 0.2% instead of 0.4% as previously reported. Economists polled by Reuters had forecast a 0.4% drop in sales. They rose 2.9% year-on-year in March.
Retail sales are primarily commodities typically purchased on credit and are not adjusted for inflation. The second consecutive monthly decline followed a sharp rise in January.
It coincided with the expiration of a temporary boost in benefits from the Supplemental Nutrition Assistance Program (SN`) approved by the US Congress to cushion low-income people and families against the rigors of the COVID-19 pandemic.
SN` is commonly known as food stamps. Morgan Stanley estimated that the phasing out of the contingency program resulted in about $4 billion in non-annualized revenue loss.
“The phasing out of SN` benefits is another catalyst that will prompt consumers at the lower end of the income spectrum to become more cautious and shift more of their wallets away from consumer staples,” said Ellen Zentner, US chief economist at Morgan Stanley in New York.
Retail Sales and Inflation
The decline in retail sales was almost across the board. Auto dealership revenue fell 1.6%. Sales at furniture stores fell 1.2%, while sales at electronics and appliances stores fell 2.1%. The sales of the building materials and garden supplies dealers collapsed by 2.1%.
Clothing store revenues fell 1.7%. Lower gasoline prices weighed on sales at service stations, which fell 5.5%. Excluding gas stations, sales fell by 0.6%.
But online retail sales rose 1.9%, likely as price-conscious consumers sought discounts and special offers. Spending on hobbies and personal hygiene increased moderately. Foodservice sales, the only service category in the retail sales report, rose slightly by 0.1%. Economists consider eating out a key indicator of household finances.
It was unclear whether a tightening of credit conditions in March following the collapse of two regional banks had an impact on retail sales. However, limited access to credit weighed on sales in the coming months.
Consumer sentiment improved in April but higher-income households turned more pessimistic, a separate report showed on Friday.
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The decline in retail sales is mainly attributed to the Fed’s year-long rate hike campaign, which is slowing inflation by cooling domestic demand. Reports last week showed that job growth and service sector activity slowed in March.
Inflation could fall further, with a third Labor Department report showing import prices fell 0.6% in March after falling 0.2% in February. This caused import prices to plunge 4.6% in the 12 months to March, the largest yoy drop since May 2020.
Wall Street stocks traded lower. The dollar rose against a basket of currencies. US Treasury bond prices fell.
inflation
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The Fed has raised interest rates by 475 basis points since last March from near zero to the current range of 4.75% to 5.00%. According to CME Group’s FedWatch tool, financial markets are eyeing another 25 basis point hike at the Fed’s May 2-3 meeting.
Excluding autos, gasoline, building materials and food services, retail sales fell 0.3% last month. These so-called core retail sales rose an unrevised 0.5% in February.
Core retail sales correspond most closely to the consumer spending component of gross domestic product. Despite falling in March, gains in January and February have kept consumer spending firmly on track to accelerate in the first quarter.
But weak core sales put consumer spending on a slower growth path going into the second quarter.
Consumer spending, which accounts for more than two-thirds of US economic activity, grew at its slowest pace in two and a half years in the fourth quarter. Economic growth estimates for the first quarter are mostly above an annualized rate of 2%. The economy grew 2.6% in the October-December quarter.
A fourth Fed report showed manufacturing output fell 0.5% in March after rising 0.6% in February. Motor vehicle production fell by 1.5%. Excluding autos, manufacturing output also fell by 0.5%.
The weakness combined with banks tightening lending standards does not bode well for corporate investment.
“This is a warning sign that the proportion of shrinking manufacturing industries is increasing, bodes ill for the economy,” said Ryan Sweet, chief economist at Oxford Economics.
Manufacturing, which accounts for 11.3% of the economy, is also suffering from the shift in spending from goods to services. Businesses are holding excess inventory as demand slows, reducing incentives to place more orders with factories.
Corporate reluctance to accumulate more inventories could also put downward pressure on GDP growth. A fifth report showed that corporate inventories rose slightly in February.
“Since inventories are a stock, it’s the change that counts for GDP,” Sweet said. “Even a slowdown from the recent rapid inventory build has the potential to weigh heavily on economic growth in the first half of this year.”
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama
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