Economy shows signs of slowing down after a hot start to the year

A fall in retail sales and easing inflationary pressures over the past month show the US economy may be cooling after a hot start to the year.

Spending in stores, online and in restaurants fell a seasonally adjusted 0.4% in February, the Commerce Department said on Wednesday. Retail sales for January have been revised to 3.2% growth, from a previous estimate of 3%. Retail sales figures are not adjusted for inflation.

Consumers spent less at restaurants, car dealerships and department stores and more on essentials at grocery stores and pharmacies. Excluding the often volatile auto sales, February’s overall purchases fell 0.1%.

A separate report on Wednesday showed that inflation has cooled over the past month. The producer price index, which broadly reflects supply conditions across the economy, fell 0.1% mom in February, the Labor Department said. On a 12-month basis, producer prices rose 4.6% in February, slowing from January’s revised down 5.7% gain.

Data suggests the economy may be cooling amid higher interest rates. The Federal Reserve aggressively raised interest rates last year to their highest level since 2007 to fight inflation. However, what action the Fed will take at a meeting next week is uncertain as the central bank also faces financial instability and bank failures.

Andrew Hunter, an economist at Capital Economics, said the Fed was able to raise interest rates by a larger amount in March than it did in February before the Silicon Valley bank collapsed.

“Now it’s not certain they even want to hike,” he said.

Mr Hunter said the slight fall in retail sales in February after January’s big jump suggests consumers are still on a relatively stable footing.

If consumer spending continues to stay cooler, it would likely weigh on the broader economy as household purchases account for about 70% of total US economic output

Morgan Stanley economists expect retail sales to weaken in the coming months. They noted that a pandemic-era food stamp program has recently expired as “the labor market continues to cool and households become more cautious as they draw on their excess savings and choose to spend a larger share of the wallet on services instead of goods”.

Retail sales have been volatile lately, falling – seasonally adjusted – over the holiday season before surging in January and falling last month. Over the past year, retail sales have grown 5.4%, slightly slower than consumer inflation of 6%.

As inflation rises in the US, rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. The WSJ’s Gwynn Guilford explains how the CPI works and what it can tell you about inflation. Image: Jacob Reynolds

The economy seemed to start the year on a strong note. Employers added more than 800,000 jobs in the first two months of the year and unemployment is trending towards a nearly half-century low.

But the impact of higher interest rates is showing up across the economy.

Sharply higher interest rates exacerbated problematic risk decisions at the $110 billion signature bank and $209 billion Silicon Valley bank, which were taken over by state regulators in recent days. High rates have also slowed orders for machinery, equipment and other manufactured goods and chilled home sales, which have declined for 12 straight months.

Some economists see weaker demand for big buying as a harbinger of a broader slowdown.

“Spending appeared to lose momentum in the second half of February after a very strong first six weeks of the year,” Bank of America economists said.

The largest cost-of-living adjustment to Social Security benefits in four decades took place in January and supported spending this month. The bank’s economists assume that this effect probably ended in February.

Wednesday’s report showed spending on interest-rate-sensitive items like vehicles and furniture, as well as discretionary spending at bars and restaurants, fell over the past month.

Sales at gas stations also fell as gasoline prices fell from $3.49 a gallon in the last week of January to $3.34 in the last week of February, according to the US Energy Information Administration.

Jerry Dawson of Hernando, Fla., says his spending is somewhat constrained. The 72-year-old sticks to the basics like new tires for his wife’s car and a new smartphone to replace a broken one.

“I think the economy is probably worse than most people give it credit for,” he said, pointing to recent bank failures. Still, he said he welcomes cost cuts on some items that have seen price increases since the pandemic, such as B. Frozen pizza at the grocery store.

Many retailers gave a cautious outlook for the current year in recent earnings reports, with some predicting continued inflationary pressures on shoppers that will keep spending unpredictable.

Throughout the winter, retailers reported mixed results, with shoppers switching to spending on essentials like groceries. Generally, retailers that base a large percentage of their sales on groceries, like Walmart inc,

fared better. Department stores and clothing retailers tended to report weaker numbers on ongoing inventory gluts and weaker demand for clothing and accessories.

Earlier this month, Macy’s Inc. said sales could fall by as much as 3% this year and won’t grow again until 2024 as consumers of all income levels remain under pressure, according to the company’s chief executive Jeff Gennette.

Walmart, the nation’s top-selling retailer, expects full-year US comparable sales to rise 2% to 2.5%, excluding fuel sales. That would be slightly below the rate of inflation that many economists forecast earlier this year.

“Customers are still spending,” said Walmart CEO Doug McMillon. “Obviously we’re not so sure what the back half of the year looks like,” he said last month.

Write to Harriet Torry at and Sarah Nassauer at

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