Retail sales fall modestly in January as American consumers pull back on spending

U.S. retail sales declined in January, marking the continuation of a spending slowdown that began in late 2023. According to Commerce Department data released Friday, retail sales fell 0.2% in January after remaining flat in December, falling short of economists’ expectations.

The report, which was delayed by the 43-day government shutdown, revealed several key factors behind the decline. Auto dealerships and gas stations saw notable decreases in sales, with the latter reflecting lower fuel prices during January. However, gas prices have been climbing in recent weeks due to escalating conflicts in the Middle East. The national average for unleaded gasoline reached $3.32 per gallon on Friday, up significantly from $2.98 just a week earlier, according to AAA.

When excluding volatile categories like gas stations and auto dealers, retail sales actually increased by 0.3% in January. Economists attribute part of January’s overall weakness to severe winter weather across much of the country, which prevented many consumers from visiting physical retail locations.

Online retailers benefited from this trend, posting a 1.9% sales increase in January as shoppers shifted to e-commerce. Other sectors showing strength included home furnishings and building materials, which encompasses landscape and gardening supplies.

Several retail categories struggled significantly in January. Health and personal care stores saw sales plummet by 3% compared to December, while clothing stores experienced a 1.7% decline. Consumer electronics and appliance retailers also faced difficulties. Even restaurants, the only service category included in the retail report, registered a 0.2% drop.

The retail sales report provides an important but incomplete picture of consumer spending, as it excludes many service categories like travel and accommodation. Economists closely watch the “control group” – which excludes sales of autos, gas, building materials, and restaurant meals – as it’s used to calculate economic growth. This metric rose 0.3% in January.

Tim Quinlan, economist at Wells Fargo, noted that January spending was stronger than the headline figures suggest, though February likely weakened further due to continuing winter weather. He anticipates higher tax refunds will support spending in March but expressed concern about rising gas prices.

“One big caveat will be how gas prices evolve in the wake of the conflict in Iran with households sensitive to the price at the pump,” Quinlan wrote. “Consumers are fairly sensitive to gas prices, and the average price of a gallon of gasoline is already up by 25 cents in the first week of March compared to the average registered in February.”

Quinlan added that while higher prices would boost nominal retail figures, they would translate to “lower real, or inflation-adjusted consumption.”

Major retailers have reported mixed results in recent earnings announcements. Walmart delivered another strong quarter, with lower prices and efficient deliveries attracting customers across economic brackets. Target, however, reported declining profits and sales during the holiday season, struggling with merchandising issues and consumers focusing primarily on essentials.

Home Depot’s fourth-quarter performance reflected caution among American consumers in a weak housing market, though results still exceeded Wall Street expectations.

Retailers are also navigating a complex tariff landscape that complicates decisions about hiring and inventory. The Supreme Court recently struck down some of former President Trump’s most significant tariffs, though new ones are being implemented. This uncertainty is contributing to caution in the job market.

The latest Labor Department report showed American employers unexpectedly cut 92,000 jobs in February, with unemployment rising to 4.4%. This represented a significant deterioration from January’s addition of 126,000 jobs and fell well short of economists’ projections of 60,000 new positions.

As consumer spending accounts for roughly 70% of U.S. economic activity, these retail trends will be closely monitored by policymakers and market analysts in the coming months for signs of broader economic shifts.