U.S. retail sales fell more than expected in March as consumers cut back on purchases of motor vehicles and other big-ticket items, suggesting that the economy was losing steam at the end of the first quarter because of higher interest rates.
Ebbing demand for goods is undercutting production at factories, with other data on Friday showing manufacturing production declining last month.
Still, the economy is not slowing fast enough to stop the Federal Reserve from raising 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.
“American consumers are pulling back, but it’s unclear how much of the fade is normal payback from an earlier binge and how much is underlying weakness,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “We suspect the headwinds are starting to dominate, and still look for a mild contraction in both spending and the economy through mid-year.”
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.
The decline in retail sales was almost across the board. Receipts at auto dealers dropped 1.6% after falling 1.3% in February. 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%.
But online retail sales jumped 1.9%, while receipts at sporting goods, hobby, musical instrument and book stores gained 0.2%. Sales at food services and drinking places, the only services category in the retail sales report, edged up 0.1%.
There is no consensus that a tightening in credit conditions in March following the failure of two regional banks impacted retail sales, though data from Citi Credit Cards showed a decline in retail spending during the month.
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.
U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
The Fed has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range. Financial markets are betting on another 25 basis point increase at the Fed’s May 2-3 policy meeting, according to CME Group’s FedWatch tool.
Excluding automobiles, gasoline, building materials and food services, retail sales slipped 0.3% last month. These so-called core retail sales increased by an unrevised 0.5% in February.
Core retail sales correspond most closely with the consumer spending component of gross domestic product. Despite March’s fall, the gains in January and February put consumer spending firmly on track to accelerate in the first quarter.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at its slowest pace in 2-1/2 years in the fourth quarter. Economic growth estimates for the first quarter are mostly below a 2% annualized rate. The economy expanded at a 2.6% pace in the October-December quarter.
A separate report from the Fed showed manufacturing production dropped 0.5% in March after increasing 0.6% in February. Manufacturing accounts for 11.3% of the U.S. economy. Output increased at a 0.3% annualized rate in the first quarter after declining at a 3.1% pace in the fourth quarter.
Manufacturing is also being hurt by the shift in spending from goods to services. Businesses are holding excess inventory as demand slows, reducing the incentive to place more orders with factories.
Last month, durable manufacturing output fell 0.9%, with most producers of long-lasting goods posting declines. Output of nondurable goods slipped 0.1%.
Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, fell 0.5 percentage point to 78.1% in March. It is 0.1 percentage point below its long-run average.