A lackluster retail sales report released Tuesday showed tepid consumer demand for goods, despite an effective tax cut from plunging oil prices.
January’s retail sales report also saw a significant downward revision, signaling apprehension about the economy among consumers.
Retail sales dropped 0.1 percent in February 2016 compared to the previous month, and January’s retail sales were revised from a 0.2 percent gain from December 2015 to a 0.4 percent drop.
This report looked weak, but if you account for falling oil prices – they were down 13% this month compared to January – it was actually much stronger than it appears. Economists cautioned about reading too much into what they referred to as an artificially weak report.
“Even if people consume around the same amount of gasoline, that is going to hold down the nominal number,” said Jim O’Sullivan, chief US economist for High Frequency Economics. “So in terms of what this is telling us about real consumer spending, the data are consistent with at least moderate growth.”
But January’s substantial downward revision has economists jittering over the domestic economy’s growth prospects. The two reports combined represent a jarring change in the tune of economic growth in the first quarter of the year.
“Now it looks like the consumer is not quite as strong as we thought. We revised our growth projections from 2.5 percent down to around 1.8 percent or so,” said Thomas Simmons, Senior Money Market Economist at Jefferies
Further, revisions of the magnitude that were made to the January report suggest tremendous volatility in the data, which should make one pause before giving too much credence to February’s advance numbers.
Economists suspect that the two months’ underwhelming reports will compel the Federal Reserve to keep interest rates unchanged when it meets on Tuesday and Wednesday.
Not only did sales in the gasoline subcategory contract by 4.4 percent last month, but a fall in oil prices affected other categories of spending too. Gasoline sales also occur at non-gasoline stations, however those sales figure into other categories’ numbers. Costco, for example, which is not a gasoline station, sells gasoline in addition to other merchandise.
Among the five categories that saw growth last month were food services and drinking places, which were up 1.0 percent from January 2016. Restaurants rebounded after a January snowstorm and had more visitors in February thanks to more mild weather.
These marginal increases in spending however still cause economists to puzzle over where consumers are spending their savings on oil, if it all. One theory is that they are being spent on services, which aren’t included in the retail sales report.
Clothing and clothing accessories stores saw a bump in spending too; sales were up 0.9 percent from January, and up 2.8 percent compared to February 2015. “My store has been up every month compared to the same periods last year,” said Sally Zunino, owner of Capri, a women’s clothing boutique in Fairfield, Connecticut. “February is our slowest month of the year – you have the deepest margin cuts you’ll ever have to get rid of remains of fall and bringing in new stuff. But because we are specialty store, we are more flexible to react,” she said.
Building materials, which was up by 1.6 percent from January, likely benefitted from warmer temperatures in February.
The report looked dim compared to the previous month, but compared to February 2015 it shows strength, especially when gasoline station sales are excluded from the tally. Retail sales in February 2016 were up 3.1 percent compared to February 2015, and when gasoline sales are excluded, they were up 4.8% from a year ago.
“That’s a pretty strong number,” said O’Sullivan. “I think the trend in consumer spending has been pretty solid,” he added.
But January’s downward revision adds up less strongly for consumer spending – of which retail sales are a part – in the first quarter of the year, and for the United States Gross Domestic Product. Consumer spending accounts for about two thirds of GDP.
Despite the slow start to 2016 economists are optimistic about spending, which is ultimately tied to the labor market. More jobs and higher wages lead to increased spending. “For the most part employment numbers have been pretty strong,” said O’Sullivan.
Wages are expected to start increasing, too. “We are still seeing solid job creation in the service sector which at some point we think is going to lead to an acceleration in wage growth,” said Simmons.
But negative changes in 13 categories are in part a by-product of weak wage growth to date. “The labor market hasn’t generated a lot of positive pressure for wages, so you can understand why the consumer would be a little more reluctant to spend a lot,” said Simmons.