Retail sales dipped modestly in January, signalling consumers are slowing spending amid economic uncertainty and a weakening job market.
Retail sales declined 0.2% in January from December, partly because of a drop in sales at auto dealerships, according to a Census Bureau report on Friday. But sales increased 3.2% from January of last year, and the January slowdown was slightly milder than economists’ forecasts.
The downturn suggests a slowing labor market along with concerns about affordability are weakening consumer spending. Since the U.S. attacked Iran on Feb. 28, U.S. oil prices pushed above $100 a barrel for the first time in more than a year and major U.S. stock prices fell. While consumer confidence had already trended weaker, it could drop further because of the war due to rising gas prices.
Separate data from the Labor Department on Friday showed that the unemployment rate rose to 4.4% in February from 4.3% in January, with the economy shedding 92,000 jobs. Consumer spending is likely to fall in the coming months.
“What drives consumer spending is making sure that you have income growth, and that has stagnated for the past couple of quarters,” said Kevin Cummins, chief economist for Natwest Markets.
There are other signs that consumers are struggling. Many Americans have dipped into their savings in January, which is unsustainable in the long term, Cummins said. Similarly, a record number of workers took a hardship withdrawal from their 401(k) plans through Vanguard Group last year, mainly to pay for medical expenses or avoid eviction and foreclosure.
Consumer spending contributes to 70% of the economy. However, Americans earning $275,000 or more account for nearly 50% of all consumer spending, while lower- and middle income spending has remained flat.
Southbay Research economist Andrew Zatlin said pullback in government spending, from the November government shutdown, to the subsidies for the Affordable Care Act expiring in January, has hurt consumer spending.
“If they’re penny pinching on healthcare, they’re probably penny pinching on going out to CVS and getting medications as well,” Zatlin said.
Motor vehicles and parts sales fell 0.9% compared to December, largely due to cold weather and lower-income consumers facing financial strain. Auto and other motor vehicle dealers sales were down 0.2% compared to January of last year. Winter Storm Fern caused massive ice and snow disruptions for the South and Northeast U.S. towards the end of January.
“There are four weekends in one month,” Zatlin said. “Everyone goes car shopping on the weekend and the storm just stripped out one weekend worth of car buying.”
Andie MacKay, a Nashville ceramicist and part-time server, is looking to purchase a car after her pre-owned 2008 Hyundai Tucson’s A/C compressor belt melted after overheating on the highway. Mackay plans to purchase another used car for sustainability reasons, but also unwillingness to pay the high interest rate offered by auto dealers.
“It’s a double-edged sword, where used cars are the most accessible, cheaper option, but you’re rolling the dice with what you’re gonna get,” MacKay said.
She purchased her Tucson two years ago for $4,500 from a private seller and has spent around $4,000 in repairs. For her next used car, she plans on taking out a loan and spending no more than $10,000 in hopes that it will not need an immediate trip to the mechanic. MacKay recently moved to Tennessee from Boston, Massachusetts and is now renting a house with three roommates.
“I was hoping to get five or six years out of this car. It’s really stressful,” she said. “I’m already going through recovering financially from moving.”
Economists usually exclude car sales from their analysis of retail sales because vehicle purchases are highly volatile, but other sectors also showed declines. Sales fell at department stores by 8.3%, in gasoline stations by 3.7% and at furniture stores 3.5% since last January, largely attributed to poor weather conditions.
While most sectors fell or remained mostly unchanged, sales went up at nonstore retailers, like Amazon or Shein, by 10.9% and food services and drinking places increased by 3.9% since January 2025, suggesting some consumer splurging despite economic strain.
“Consumers continued to show signs of resilience to start the year,” Cummins said. “But there’s a lot of uncertainty going forward.”
