US retail sales start 2024 on a weak footing

High borrowing costs and tightening credit conditions finally appear to be crimping spending behavior

By Stuart Cole | @Stuart Cole | 15 February 2024


Today’s US retail sales figures came in softer than expected, with the pullback in spending broad based in a sign that US consumers may finally be responding to higher borrowing costs and the increasing hurdles being faced when trying to secure credit. The headline retail sales figure for January fell by -0.8%, much sharper than the -0.2% figure expected and coming on the back of December’s reading also being revised lower from 0.6% to 0.4%. Some weakness in the headline number was expected, given the falls seen in fuel prices and auto sales, but stripping out these items still showed sales ex-autos and fuel falling by -0.5%, leaving a deep-seated picture of declining consumer spending.

Providing a contributary factor to today’s disappointing numbers may have been the weather, with snow coverage in January approximately 8% heavier than that typically seen. And this matters when deciding whether to drive to shopping malls or restaurants etc. Separately, motor vehicle sales fell by -1.8%, continuing the downwards trend that has been in place for a while now, reflecting both an ending of the pent-up demand that had previously been seen on the back of supply-chain constraints and the fact that interest rates on car loans are now proving to be prohibitively high. Given the significance of auto sales in US spending patterns, this decline looks set to act as a significant drag on consumption growth in Q1. But even taking these two factors into consideration, the outlook for consumption looks troubling.

The picture emerging is that consumer spending remained strong over much of last year, but that this strength is now waning, likely a consequence of the excess savings balances built up over the pandemic period now having been largely exhausted and from real post-tax income growth simultaneously slowing. There is no suggestion that spending is going to collapse, but a gradual moderation does look likely. And while some of today’s weakness may be explained by seasonal adjustment factors, any pullback in consumer spending – which accounts for some two-thirds of economic activity – would present a weaker growth outlook for this year than 2023.

Overall, it presents a potentially more complicated situation for the Fed, which is left trying to balance a resilient labour market, robust wages growth and stubborn inflationary pressures, against signs of weakening consumption and potentially lower growth. And it suggests 2024 may be much more difficult for it than last year turned out to be, as it attempts to return inflation back to its 2% target while at the same time avoiding a sharp deterioration in economic activity.

Consumer spending may be slowing as excess savings balances are depleted and real income growth slows.