Washington: U.S. retail sales experienced their steepest decline in nearly two years this January, weighed down by severe winter weather, wildfires, and ongoing motor vehicle shortages. The decline signals a potential slowdown in economic growth at the start of the first quarter.
However, despite the larger-than-expected drop across multiple sectors, economists suggest this does not indicate a fundamental shift in consumer spending. The downturn follows four consecutive months of robust retail growth, and a significant upward revision to December’s figures mitigated some of the report’s negative implications. Analysts also note that seasonal fluctuations at the turn of the year make it challenging to extract clear trends from the data, as seen in the latest consumer inflation report.
Economic Implications and Federal Reserve Outlook
Economists anticipate that the Federal Reserve will maintain its current stance on interest rates, delaying any potential cuts until the latter half of the year. Some of the policies under former President Donald Trump, including broad tariffs on imports, continue to cast uncertainty over the economy.
“The drop was dramatic, but several mitigating factors show there’s no cause for alarm,” said Robert Frick, corporate economist at Navy Federal Credit Union.
According to data from the Commerce Department’s Census Bureau, retail sales dropped by 0.9% in January—the sharpest decline since March 2023—following an upwardly revised 0.7% increase in December. This was significantly steeper than the 0.1% dip economists polled by Reuters had forecast. Year-over-year, retail sales still posted a 4.2% increase.
US retail sales dropped by the most in nearly two years in January, likely weighed down by frigid temperatures, wildfires and motor vehicle shortages, suggesting a sharp slowdown in economic growth early in the first quarter https://t.co/LcGKsvUAUM pic.twitter.com/5cqoDfikpe
— Reuters (@Reuters) February 14, 2025
Impact of Extreme Weather and Tariffs
Much of the U.S. was affected by heavy snowfall and freezing temperatures in January, while wildfires ravaged entire neighborhoods in Los Angeles.
“The wildfires in Los Angeles, the second-largest metro area in the U.S., and severe winter weather in other parts of the country, may have limited face-to-face shopping activity,” said Jay Hawkins, a senior economist at PNC Financial.
Some economists also speculate that inflation concerns and confusion surrounding tariffs contributed to the sales decline. In recent months, preemptive buying in anticipation of tariffs that could increase consumer prices helped boost retail activity. However, consumer sentiment has weakened, with a University of Michigan survey indicating that one-year inflation expectations reached a 15-month high in early February.
“Maybe people are getting confused on the tariff story and think they are happening immediately and are therefore not even considering a purchase,” said James Knightley, chief international economist at ING. “We will need to wait until the February data to see if this is the start of a more cautious consumer trend or simply a weather-related pullback.”
A 25% tariff on Mexican and Canadian goods was postponed until March, while an additional 10% tariff on Chinese imports took effect in January. Trump has tasked his economic advisors with drafting reciprocal tariff measures against nations imposing taxes on U.S. imports.
Stock Market and Federal Reserve Stance
Following the release of the retail sales data, Wall Street stocks remained subdued, the U.S. dollar weakened against a basket of currencies, and Treasury yields declined.
The Federal Reserve left its benchmark interest rate unchanged in the 4.25%-4.50% range in January, having cut it by 100 basis points since September when it began its policy easing cycle. This followed an aggressive tightening phase in 2022 and 2023, during which the rate was raised by 5.25 percentage points to combat inflation.
Retail Sector Breakdown
Motor vehicle sales led the decline, with receipts at auto dealerships falling 2.8% in January after a 0.9% rise in December. Harsh weather likely deterred potential buyers, while vehicle shortages may have also played a role. Census Bureau data shows that retail motor vehicle inventories were depleted in December, with Federal Reserve figures revealing a 5.2% decline in vehicle production in January.
Sales in other retail categories also fell sharply:
- Sporting goods, hobby, musical instrument, and bookstore sales dropped 4.6%.
- Online retail sales declined by 1.9%.
- Building material store sales decreased by 1.3%.
- Furniture, clothing, and electronics retailers saw notable sales declines.
Despite the broader downturn, food services and drinking places—considered a key indicator of household financial stability—saw a 0.9% increase in sales, following a modest 0.1% uptick in December. Higher gasoline prices also contributed to a 0.9% increase in service station sales.
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Consumer Spending and Economic Growth Projections
Consumer spending remains supported by a resilient labor market and steady wage growth, keeping the broader economic expansion on track. Household wealth continues to rise, bolstered by high home prices, though stock market fluctuations have tempered some gains.
Core retail sales—excluding automobiles, gasoline, building materials, and food services—fell 0.8% in January after an upwardly revised 0.8% jump in December. These core figures align closely with consumer spending data used in GDP calculations.
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Some economists estimate that inflation-adjusted consumer spending was flat or slightly negative in January. Strong consumer spending helped offset GDP drag from inventory drawdowns in the fourth quarter. The Atlanta Fed revised its first-quarter GDP growth estimate downward to 2.3% from 2.9%. The economy expanded at a 2.3% rate in the previous quarter.
“The underlying strength of the economy remains largely unchanged,” said Tuan Nguyen, U.S. economist at RSM US. “If that strength persists, we should expect sales to rebound in the coming months.”
