Kiplinger's Retail Outlook: Snow Slowed January Sales

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Wintry weather hit much of the eastern and central United States in January, slowing retail sales. Winter months often obscure underlying consumer spending trends because bad weather can keep shoppers at home. The modest drop in ecommerce sales could be an indicator that December’s sales strength would not have been maintained anyway, even without the weather effect. Also, November and December sales were revised down a large amount, reversing previous conclusions that consumers were in overdrive at the end of the year. 

Narratives on the health of the consumer will have to wait to see how big the expected February rebound in sales will be. The next Census Bureau retail sales data release will be on March 14. 

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January sales excluding gasoline dropped 0.8%, the largest decline since last March. Sales were down in most categories, with the biggest drops in building materials (-4.1%), miscellaneous stores (-3.0%) and motor vehicles (-1.8%). There were some positives: furniture and home furnishings (1.5%), restaurants (0.7%), groceries (0.6%) and surprisingly, department stores (0.5%).

Consumer spending on services excluding restaurants rose a strong 0.7% in December, the latest month for which data are available. Services spending has grown at a brisk level, rising 6.4% at an annual rate over the four months from September to December, and 2.5% after adjusting for inflation. We expect a slowdown in January data because of the weather. 

A strong February sales rebound could make investors nervous that the Federal Reserve might delay its hoped-for interest rate cuts, but we expect a spending slowdown in the near future. The economy in general is due to cool a bit in the next six months, with a gradually weakening labor market. Saving rates have been much lower than their historical norms and will likely begin to rise slowly, cutting into future retail spending. Student loan repayments started up in October, and along with higher interest rates on consumer loans, that may weaken some households’ spending power.

Goods spending is also due to slow eventually because consumers will switch to buying more services as their need for goods levels off. Purchases of goods soared at the beginning of the pandemic in 2020. While services have picked up since then, the share of goods in household spending is still well above its prepandemic norm. That suggests a coming drop in goods buying as the economy slows.

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