© Reuters. FILE PHOTO: A client browses for clothes at a Walmart retailer in Flagstaff, Arizona, U.S., October 19, 2022. REUTERS/Lisa Baertlein
By Lucia Mutikani
WASHINGTON (Reuters) – U.S. retail gross sales fell reasonably in February, probably payback after the prior month’s outsized improve, however the underlying momentum remained robust, suggesting the economic system continued to develop within the first quarter regardless of greater borrowing prices.
The report from the Commerce Department on Wednesday, which adopted on the heels of knowledge final week exhibiting strong job progress in February, prompted economists to improve their gross home product progress estimates for this quarter. News on inflation was considerably encouraging. Producer costs fell final month, resulting in the smallest year-on-year improve in practically two years.
Economic information is, nevertheless, taking a backseat to the unfolding turmoil within the monetary sector, the place the current failure of two regional banks has stoked fears of contagion.
That has left the outlook for subsequent Wednesday’s rate of interest determination from the Federal Reserve extremely unsure.
“American consumers still appear to be spending at a rate that will make the Fed uncomfortable with the inflation outlook, warranting a further tap on the brakes,” mentioned Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Of course, the Fed now has bigger fish to fry, making next week’s decision less dependent on the data and more reliant on how the banking turmoil evolves.”
Retail gross sales dropped 0.4% final month. Data for January was revised greater to point out retail gross sales rising 3.2% as an alternative of three.0% as beforehand reported. Economists polled by Reuters had forecast gross sales would fall 0.3%, with estimates starting from a 1.0% decline to a 0.5% improve.
Retail gross sales are largely items and are usually not adjusted for inflation. Economists mentioned challenges adjusting the information for shifts in spending patterns on the finish and begin of the 12 months in addition to greater costs have been among the many components that had exaggerated January’s retail gross sales surge.
Last month’s decline in retail gross sales was led by motorcar purchases, with receipts at auto sellers dropping 1.8% after accelerating 7.1% in January. Furniture retailer gross sales fell 2.5%, whereas receipts at clothes shops decreased 0.8%.
Receipts at meals companies and consuming locations, the one companies class within the retail gross sales report, tumbled 2.2%. But on-line retail gross sales elevated 1.6%, whereas receipts at electronics and equipment shops rose 0.3%.
Spending is being supported by a good labor market, which is producing greater wage progress. There have been 1.9 job openings for each unemployed particular person in January. Consumers nonetheless have an enormous quantity of financial savings amassed throughout the COVID-19 pandemic.
Financial markets noticed a 50/50 likelihood of a quarter-point charge hike or pause on the Fed’s coverage assembly subsequent Tuesday and Wednesday, in keeping with CME Group’s (NASDAQ:) FedWatch instrument.
The U.S. central financial institution has raised its benchmark in a single day rate of interest by 450 foundation factors since final March from near-zero to the present 4.50%-4.75% vary.
“Recent bank failures and the spike in financial market stress are complicating policymakers’ task of reading the economic tea leaves,” mentioned Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “A pause in the hiking cycle would be premature as inflation continues to run hot and GDP growth remains resilient.”
U.S. shares fell on the banking sector turmoil. The greenback jumped versus a basket of currencies. U.S. Treasury costs rose.
(Graphic: Retail gross sales – https://www.reuters.com/graphics/USA-STOCKS/zgpobambgvd/retailsales.png)
According to Bank of America (NYSE:) Securities, an evaluation of the financial institution’s card information confirmed that companies spending considerably outperformed items spending in February. While this implies the rotation of spending again to companies helped to undercut retail gross sales final month, it ought to help general shopper spending.
Excluding vehicles, gasoline, constructing supplies and meals companies, retail gross sales rose 0.5% final month. These so-called core retail gross sales elevated 2.3% in January, revised up from the beforehand reported 1.7%.
Core retail gross sales correspond most intently with the patron spending element of gross home product. Economists mentioned shopper spending, which accounts for greater than two-thirds of the U.S. economic system, was on observe to speed up this quarter, prompting some Wall Street banks, together with JPMorgan (NYSE:) and Barclays (LON:), to spice up their GDP forecasts.
The Atlanta Fed raised its first-quarter GDP progress estimate to a 3.2% annualized charge from a 2.6% tempo.
The outlook was, nevertheless, tempered by a second report from the Commerce Department exhibiting companies inventories fell for the primary time in practically two years in January. Inventory accumulation, most of it undesirable, was the foremost contributor to the economic system’s 2.7% progress tempo within the fourth quarter.
A 3rd report from the Labor Department confirmed the producer value index for remaining demand slipped 0.1% in February. Data for January was revised down to point out the PPI rising 0.3% as an alternative of 0.7% as beforehand reported.
In the 12 months by February, the PPI elevated 4.6%. That was the smallest annual achieve within the PPI since March 2021 and adopted a 5.7% rise in January.
(Graphic: Inflation – https://www.reuters.com/graphics/USA-STOCKS/akveqezqbvr/inflation.png)
With shopper and producer costs information in hand, economists forecast that the non-public consumption expenditures (PCE) value index excluding the risky meals and vitality elements elevated by about 0.3% in February after surging 0.6% in January. That would decrease the annual improve within the so-called core PCE value index to 4.6% from 4.7% in January.
The core PCE value index is likely one of the inflation measures tracked by the Fed for its 2% goal.
“The inflation data continues to point toward the need for more restraint on an overheated economy,” mentioned Andrew Hollenhorst, chief U.S. economist at Citigroup (NYSE:) in New York.