Weak retail sales, manufacturing output data point to slowing US economy

U.S. retail sales fell more than expected in March as consumers cut back on purchases of big-ticket items, suggesting that the economy was losing steam at the end of the first quarter because of higher interest rates.

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With the labor market cooling, retail sales are likely to remain weak. Ebbing demand for goods is undercutting production at factories, with other data on Friday showing manufacturing production declining last month. Still, the Federal Reserve is poised to raise rates one more time in May, before an anticipated pause in June in the U.S. central bank's fastest monetary policy tightening cycle since the 1980s.

"Households are clearly feeling the pinch from rising interest rates and the extended period of high inflation and are reducing expenses to compensate," said Ben Ayers, a senior economist at Nationwide in Columbus, Ohio. "While job and income gains remain strong, the cracks in the consumer sector are widening and a negative shift in hiring activity could be the final blow to place the economy in a recession."

Retail sales dropped 1.0% last month, the Commerce Department said. Data for February was revised up to show retail sales falling 0.2% instead of 0.4% as previously reported. Economists polled by Reuters had forecast sales slipping 0.4%. They increased 2.9% year-on-year in March.

Retail sales are mostly goods, which are typically bought on credit, and are not adjusted for inflation. The second straight monthly decrease followed a sharp surge in January.

It coincided with the expiration of a temporary boost to the Supplemental Nutrition Assistance Program (SNAP) benefits authorized by the U.S. Congress to cushion low-income people and families against the hardships of the Covid-19 pandemic.

SNAP is commonly known as food stamps. Morgan Stanley estimated that the expiration of the emergency program resulted in about a $4 billion non-annualized hit to income.

"The expiration of SNAP benefits is another catalyst that will lead consumers at the lower end of the income spectrum to become more cautious spenders and allocate a greater share of their wallet away from discretionary items," said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York.

.​The decline in retail sales was almost across the board. Receipts at auto dealers dropped 1.6%. Furniture store sales fell 1.2%, while receipts at electronics and appliance stores tumbled 2.1%. Sales at building material and garden equipment supplies dealers plummeted 2.1%.

Receipts at clothing outlets dropped 1.7%. Lower gasoline prices depressed sales at service stations, which plunged 5.5%. Sales were down 0.6% excluding gasoline service stations.

But online retail sales jumped 1.9%, likely as price-conscious consumers sought discounts and deals. Spending on hobbies and grooming increased moderately. Sales at food services and drinking places, the only services category in the retail sales report, edged up 0.1%. Economists view dining out as a key indicator of household finances.

It was unclear whether a tightening in credit conditions in March following the failure of two regional banks had impacted retail sales. But reduced access to credit was seen weighing on sales in the months ahead.
Consumer sentiment improved in April, but higher-income households grew more pessimistic, a separate report showed on Friday.

The pullback in retail sales is mostly attributed to the Fed's year-long interest rate hiking campaign, which is slowing inflation by cooling domestic demand. Reports last week showed employment growth and services sector activity slowing in March.

Inflation could continue to retreat, with a third report from the Labor Department showing import prices dropping 0.6% in March after slipping 0.2% in February. That resulted in import prices plunging 4.6% in the 12 months through March, the largest year-on-year drop since May 2020.

Stocks on Wall Street were trading lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.