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Retail sales declined 0.9% in January, most likely for two reasons: First, snowstorms in parts of the country and wildfires in California may have damped shopping. Second, spending had been strong in December (and was revised up with this month’s report), so consumers may have been catching their breath after splurging ahead of the holidays. Motor vehicle sales in November and December were certainly unsustainably strong, for instance. They dropped 2.8% in January, but remain 1% above their October level. Sales of furniture, clothing and sporting goods also declined after a jump in December. Ecommerce sales dropped 2% in January, though sales of general merchandise rose 0.5%. Restaurant sales had a good month, rising 0.9%.
Consumer spending on services excluding restaurants rose a moderately strong 0.6% in December, rebounding from a weak November. (December is the latest month for which services spending data are available.) Spending on services has been pretty consistent, with 0.5% to 0.6% increases in eight of the previous nine months. This consistency is expected to continue, given that disposable income has been growing at better than 5% annually since late 2022.
Consumers may not be pulling back yet, and retail spending in 2025 could still be decent. But uncertainties abound. A new administration with new policies is taking office. The Federal Reserve has likely stopped cutting interest rates for a while. A gradually cooling labor market could eventually cause consumers to think about boosting their savings instead of shopping more. The savings rate is running at a meager 4.4% currently, but that low level may not last. However, don’t expect any sudden pickup in saving and accompanying decline in spending. That only occurs when unemployment rises sharply and consumers start worrying about losing their jobs. But saving rates have been lower than the historical norm and may begin to rise slowly, which would cut into cash available to support future retail spending. Still-high interest rates on consumer loans will likely continue to dampen lower-income households’ spending power, too.
