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Retail Sales Continue to Disappoint as Consumers Shift Spending

Are consumers spending or not?

Retail sales fell 0.2 percent in February, but the January sales report was revised higher with growth now at 0.7 percent from the initial 0.2 percent level reported. While non-store retailers such those in the e-commerce channel were up 0.9 percent and sporting goods and hobby retailers were up 0.5 percent, apparel and accessories stores were down 0.4 percent, and sales at furniture and home furnishings retailers fell 0.5 percent, according to data from the U.S. Census Bureau. Sales at general merchandise stores were down 0.3 percent.

“Retail sales continue to disappoint, ” said Scott Hoyt, senior director for Moody’s Analytics. “There are several explanations for the weakness: Consumers are increasingly shifting their spending to services; the weakness in the stock market has likely undermined spending by important high-income households, and temporary factors such as the partial government shutdown, slower tax refunds and weather may have also played a role.”

While the closure of Toys ‘R’ Us explains the drop in sales at sporting goods and hobby stores in December and the rebound in January once seasonal factors were no longer relevant, Hoyt noted one puzzling factor, saying the “lack of a related lift in other segments is hard to understand.”

Retail sales growth should rebound modestly in the months ahead, according to Hoyt, particularly with the expectation of a lower unemployment rate later this year. But there are other risks ahead too, such as the potential increase in tariffs, which would impact consumer prices, and the risk of higher energy prices.

On a year-over-year basis, total retail sales rose 2.1 percent in February, led by a 10 percent gain in e-commerce sales. Excluding gasoline prices, total year-over-year retail sales growth was 2.6 percent in February.

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Samuel D. Coffin, economist at UBS Securities, said that the February weakness likely reflects the timing of tax refunds and should prove temporary. Moreover, the upward revision to January means less weakness on first-quarter consumption than initially thought. Coffin expects a modest rebound in March spending.

Mickey Chadha, vice president and credit analyst at credit ratings firm Moody’s Investor’s Service, said, “Although price competition and weak retail categories like department stores, sporting goods and electronics will continue to pressure sales, we expect total retail sales to grow over 4.5 percent year-over-year in 2019, driven by e-commerce, home improvement, healthy and personal care, auto parts and big box and discount retailers.”

NRF chief economist Jack Kleinhenz believes consumer spending is still relatively strong.

“The weaker-than-expected February retail sales numbers reflect colder weather and increased precipitation that kept shoppers home, but were also skewed downward because of the government’s upward revision in January’s results,” he said.

Kleinhenz said the erratic stock market, government shutdown and slower tax refunds likely impacted the data collection for the December, January and February results, adding that tax refunds traditionally help drive spending in the early months of each year. But he also felt that strong fundamentals such as job and wage growth will fuel spending, concluding that the “consumer will continue to provide direction and strength to the U.S. economy in the months ahead.”

For now, NRF is forecasting retail sales growth at between 3.8 percent and 4.4 percent in 2019 to more than $3.8 trillion.