US retail sales rebound moderately; underlying trend remains firm

U.S. retail sales in February edged up by 0.2% as consumers pulled back on discretionary spending, signaling cautious optimism amid a broader economic backdrop marked by tariffs and federal workforce cuts.

The Commerce Department’s Census Bureau report on Monday painted a mixed picture: while overall retail activity improved slightly, spending at restaurants and bars fell, reflecting more guarded consumer behavior.

"This report should alleviate concerns that the economy already is shrinking," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. However, he warned that the risk of much weaker growth remains elevated, as consumers might seek to rebuild their savings in response to uncertainties over job security.

The report indicated that retail sales, which largely reflect goods and are not adjusted for inflation, rose by 0.2% in February. This modest rebound followed a downwardly revised 1.2% decline in January—a period marked by robust fourth-quarter gains and weather disruptions including winter storms and wildfires in California. Year-on-year, sales increased by 3.1%, bolstered by a 2.4% jump in online store receipts and a 1.7% rise at health and personal care outlets.

However, the gains were not uniform across sectors. Sales at building material and garden equipment suppliers increased by 0.2%, while auto dealership receipts fell 0.4% after a steep 3.7% drop in January. Furniture store sales remained flat, clothing store receipts dipped 0.6%, and electronic retailers saw a 0.3% decline. The services segment fared worse; food services and drinking places registered a 1.5% drop, and lower gasoline prices contributed to a 1.0% decrease in sales at service stations.

Discretionary spending appears to be softening. Bank of America card data for the Washington, D.C. metropolitan area—encompassing parts of Maryland and Virginia—showed early signs of reduced spending at restaurants. With consumer sentiment sinking to a near 2-1/2-year low in March, many analysts expect that consumer spending could weaken further in the coming months.

Economic headwinds also loom from President Donald Trump’s tariffs, which have sparked a trade war, and from mass layoffs of public workers as the Trump administration pursues a campaign to shrink the federal workforce. Retailers such as Kohl's, Macy's, Walmart, and Target have already tempered their sales expectations amid mounting inflation and recession fears.

On the monetary policy front, U.S. Treasury yields rose while the dollar slipped against a basket of currencies. Federal Reserve officials, meeting later this week, are expected to keep the overnight interest rate in the 4.25%-4.50% range. The Fed has trimmed rates by 100 basis points since September, and financial markets anticipate that the central bank may resume cutting borrowing costs in June, following a pause in its easing cycle that began in January.

Looking at the core retail segment—excluding volatile categories such as automobiles, gasoline, building materials, and food services—sales rose by 1.0% in February after a revised 1.0% decline in January. These core sales are closely linked to consumer spending in gross domestic product calculations, and economists had forecast a rebound of 0.3% following a previously reported 0.8% drop in January. Despite the modest gains, expectations are that consumer spending will slow significantly in the first quarter compared to the robust 4.2% annualized growth observed in the fourth quarter, when the economy expanded at a 2.3% pace.

The Atlanta Federal Reserve forecasts GDP could contract by 2.4% this quarter, although most economists are converging on a growth rate of around 1.2%. As the economy navigates these challenges, the underlying trend in retail sales appears firm, even as cautious consumers adjust their spending in response to an uncertain economic landscape.

Copied