Retail sales surge as consumers continue buying
Retail sales surged in January, a sign of the resiliency of consumers as prices continued rising at a rapid pace. It was also good news for companies but a potential worry for the Federal Reserve as it tries to slow the economy to rein in inflation.
U.S. retail sales increased 3% in January from the previous month, much higher than the 2% increase expected by economists in a Bloomberg survey. That's a reversal from the 1.1% decline posted December, and the biggest rise since March 2021.
The data, which can be volatile month to month, is adjusted for seasonality but does not account for price changes, meaning that inflation — which cooled very slightly in January, but showed signs of stickiness — contributed at least partly to the monthly jump.
Nearly every retail category saw a lift in sales last month, with car dealerships, furniture sellers and electronics stores recording notable increases. Sales at department stores were up 17.5%, a surprising bump given that the post-holiday shopping season is usually among the slowest selling season for department stores. Sales at gas stations were flat.
The apparent robustness of shoppers at the beginning of the year could make retailers more optimistic about their businesses in 2023. There have been concerns that consumers could pull back as they contend with rapid price increases and burn through savings, shrinking retailers' profit margins and lowering their sales. But the labor market has remained strong and wage growth solid, keeping cash in people's pockets and helping to power continued spending.
Spending in January may also have been lifted in part by a significant, 8.7% cost of living adjustment that started arriving in Social Security checks last month, increasing income for many older Americans.
Executives have noted the sturdy consumer demand.
“Right now, we feel really good about our retail
ers,” David Simon, chief executive of the Simon Property Group, which operates malls across the country, said in an analyst call this month. Simon said he regularly asks colleagues about signs of pullback in consumer demand and “it's not really happened.”
Still, some retail chiefs are wary of how much higher prices can go before consumers push back.
“We don't want to raise too much prices to then lower them again because we have a promise that we've made to the customers that we should deliver the best value for money,” Helena Helmersson, the chief executive of H&M, the Sweden-based fast-fashion retailer, said in a call with analysts last month.
The Fed has raised interest rates aggressively over the past year to try to weigh on consumer and business demand, hoping to cool the economy enough that it forces companies to stop raising prices so much. Central bankers have pushed borrowing costs to above 4.5%, from near-zero at this time last year, and have forecast at least a couple more rate increases in the coming months.
But those adjustments — the most drastic since the 1980s — seem like they may have temporarily dimmed strong demand rather than snuffing it out decisively. The housing market has cooled and consumer spending had shown clear signs of pulling back in recent months, but the labor market has remained very strong and some parts of the economy appear to be on the brink of accelerating again.
The retail sales report “suggests that any sign we got late last year that consumer spending was flagging was a bit of a false signal,” said Jonathan Millar, senior U.S. economist at Barclays. “It suggests that consumers are in pretty good shape here: The Fed's rate hikes haven't done a lot to slow spending.”
Millar said that some of the weakness in December sales could have come from cold weather and a holiday shopping season that started earlier because of promotions, including an Amazon sale day in October. Because January's figures constituted a bounceback, they appeared unusually strong.
Other analysts suggested that spending may continue to be shaped by people's response to the pandemic.
“People are back in stores. They're figuring out what the future looks like working from home or hybrid,” said Katie Thomas, who leads the Kearney Consumer Institute, a think tank. “We put a lot of stock into assumptions of certain pandemic behaviors that didn't end up being so sticky.”