March 14, 2024 – 8:01 AM PDT
WASHINGTON (Reuters) – U.S. retail sales rebounded less than expected in February and consumer spending appeared to be slowing in the first quarter amid rising inflation and high borrowing costs.
The signs of slowing economic activity are, however, unlikely to spur the Federal Reserve to start cutting interest rates before June as other data on Thursday showed a larger-than-expected increase in producer prices last month.
The labor market also remains fairly tight. Fewer Americans applied for unemployment benefits last week and annual revisions to the weekly claims data showed laid-off workers were quickly finding new work and not spending as long a period of time on jobless benefits as had been previously thought.
“When the Fed is contemplating a series of rate cuts and is confronted by suddenly slower economic growth and suddenly brisker inflation, they will respond to the new news on the inflation side every time,” said Chris Low, chief economist at FHN Financial. “After all, this is not the first time in the past couple of years consumers have paused spending for a couple of months to catch their breath.”
Retail sales rose 0.6% last month, the Commerce Department’s Census Bureau said. Data for January was revised lower to show sales tumbling 1.1% instead the previously reported 0.8%.
Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.8% in February.
They increased 1.5% on a year-on-year basis in February. Consumer spending is holding up despite higher inflation, though households are increasingly focusing on essentials and cutting back on discretionary spending.
Building material and garden equipment store sales rebounded 2.2%. Receipts at motor vehicles and parts dealers accelerated 1.6%. Sales at gasoline stations increased 0.9%, reflecting higher prices at the pump.
Receipts at electronics and appliance outlets surged 1.5%.
But online sales dipped 0.1%. There were also decreases in sales at clothing, health and personal care stores. Furniture store sales decreased 1.1%. sporting goods, hobby, musical instrument and sales at book stores were unchanged.
Sales at food services and drinking places, the only services component in the report, rebounded 0.4% after dropping 1.0% in January. Economists view dining out as a key indicator of household finances.
Retail sales excluding automobiles, gasoline, building materials and food services were unchanged in February.
This so-called core retail sales measure corresponds most closely with the consumer spending component of gross domestic product. Core sales for January were revised to show them decreasing 0.3% instead of the previously reported 0.4%.
Consumer spending is cooling in the first quarter after helping to fuel economic growth in the fourth quarter of 2023. Spending, however, remains supported by a fairly tight labor market. Economists see no imminent recession.
The Atlanta Fed is forecasting GDP to increase at a 2.5% annualized rate in the first quarter. The economy grew at a 3.2% pace in the fourth quarter.
U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
TIGHT LABOR MARKET
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 209,000 for the week ended March 9. Economists had forecast 218,000 claims for the latest week.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 17,000 to 1.811 million during the week ending March 2.
The government revised the data for both the initial and so-called continuing claims from 2019 through 2023. It also implemented new models to seasonally adjust both initial claims and continued claims this year and revised seasonal factors for both series from 2019 through 2023.
Continuing claims over the past three months were revised significantly lower.
“Frankly, this is more consistent with the strong gains in payroll jobs reported for February, January and December,” said Stuart Hoffman, senior economic advisor at PNC Financial. “The labor market is becoming better balanced between demand for and supply of workers, which will help moderate upward wage pressures.”
The Fed has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range since March 2022. The U.S. central bank is expected to start cutting rates by June.
Another report from the Labor Department showed the producer price index for final demand rose 0.6% in February after advancing by an unrevised 0.3% in January. Economists had forecast the PPI would climb 0.3%.
A 1.2% jump in the prices of goods accounted for nearly two-thirds of the increase in the PPI. Goods prices were driven by energy products, which surged 4.4% after declining 1.1% in January. Goods prices had edged down 0.1% in January.
In the 12 months through February, the PPI shot up 1.6% after advancing 1.0% in January. The report followed news on Tuesday that consumer prices increased strongly for a second straight month in February.
Wholesale gasoline prices rose 6.8% last month. Food prices were up 1.0%, amid increases in the cost of eggs and beef.
Excluding food and energy, goods prices rose 0.3%, matching January’s gain. This suggests that goods deflation, the major driver of lower inflation, was drawing to an end and services would need to pick up the slack in easing price pressure.
Services gained 0.3% in February after rising 0.5% in the prior month. A 3.8% increase in the cost of hotel and motel rooms accounted for a quarter of the increase in services prices.
There were also increases in the costs of outpatient care and airline tickets. Portfolio management fees gained 0.2% after accelerating by 5.9% in January.
Portfolio management fees, healthcare, hotel and motel accommodation, and airline fares are among the components that go into the calculation of the personal consumption expenditures (PCE) price indexes. The PCE price indexes are the inflation measures tracked by the Fed for it 2% target.
With the CPI and PPI data in hand, economists estimated that the core PCE price index increased 0.3% in February after gaining 0.4% in January. Core inflation is forecast to rise 2.8% in February, which would match January’s gain.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao