US economy cooling in first quarter; inflation appears sticky

An independent barber waits for customers on his van in a local street in New York, U.S., December 25, 2023. REUTERS/Eduardo Munoz/File Photo

WASHINGTON — U.S. retail sales rebounded less than expected in February, suggesting a slowdown in consumer spending in the first quarter amid rising inflation and high borrowing costs.

The signs of slowing economic activity are, however, unlikely to spur the Federal Reserve to start cutting interest rates before June as other data on Thursday showed a larger-than-expected increase in producer prices last month.

The labor market also remains fairly tight. Fewer Americans applied for unemployment benefits last week and annual revisions to the weekly claims data showed laid-off workers were quickly finding new work and not spending as long a period of time on jobless benefits as had been previously thought.

“When the Fed is contemplating a series of rate cuts and is confronted by suddenly slower economic growth and suddenly brisker inflation, they will respond to the new news on the inflation side every time,” said Chris Low, chief economist at FHN Financial.

READ: Fed seen on hold until June, with rate-cut pace in focus

“After all, this is not the first time in the past couple of years consumers have paused spending for a couple of months to catch their breath.”

Auto sales rebound

Retail sales rose 0.6 percent last month, the Commerce Department’s Census Bureau said. Data for January was revised lower to show sales tumbling 1.1 percent instead the previously reported 0.8 percent.

Sales in December were also downgraded. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.8 percent in February.

They increased 1.5 percent on a year-on-year basis in February.

Sales last month were boosted by a 1.6-percent rebound in receipts at motor vehicles and parts dealers. Sales at gasoline stations increased 0.9 percent, reflecting higher prices at the pump. Receipts at electronics and appliance outlets surged 1.5 percent. Building material and garden equipment store sales rebounded 2.2 percent.

READ: Strong US retail sales underscore economy’s momentum heading into 2024

But online sales dipped 0.1 percent. There were also decreases in sales at clothing, health and personal care stores. Furniture store sales decreased 1.1 percent. Sales at sporting goods, hobby, musical instrument and book stores were unchanged.

Sales at food services and drinking places, the only services component in the report, rebounded 0.4 percent after dropping 1 percent in January. Economists view dining out as a key indicator of household finances. Households are increasingly focusing on essentials and cutting back on discretionary spending.

“There’s ultimately more competition for consumers’ dollars today while still-high prices for frequent purchases like food and gasoline may be diverting discretionary funds, just as higher interest payments may also be somewhat crowding out consumption,” said Tim Quinlan, a senior economist at Wells Fargo.

Retail sales excluding automobiles, gasoline, building materials and food services were unchanged in February.

This so-called core retail sales measure corresponds most closely with the consumer spending component of gross domestic product. Core sales for January were revised to show them decreasing 0.3 percent instead of the previously reported 0.4 percent. Core sales in December were revised lower.

Labor market

The data and an unexpectedly flat reading in business inventories in January prompted the Atlanta Fed to trim its first-quarter GDP growth estimate to a 2.3 percent annualized rate from a 2.5 percent pace. The economy grew at a 3.2-percent rate in the fourth quarter, fueled by consumer spending.

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

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 209,000 for the week ended March 9. Economists had forecast 218,000 claims for the latest week.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 17,000 to 1.811 million during the week ending March 2.

READ: US weekly jobless claims unexpectedly fall

The government revised the data for both initial and so-called continuing claims from 2019 through 2023. It also implemented new models to seasonally adjust both initial claims and continued claims this year and revised seasonal factors for both series from 2019 through 2023.

The level of continuing claims over the last year was revised sharply lower. Data for January and February were also downgraded, aligning with strong payrolls growth that period.

“The revised data for continued claims are consistent with a job market that is showing some signs of loosening but is still relatively strong,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

The U.S. central bank has raised its policy rate by 525 basis points to the current 5.25 percent-5.5 percent range since March 2022, and is expected to start lowering borrowing costs by June.

Producer price index

Another report from the Labor Department showed the producer price index for final demand rose 0.6 percent in February after advancing 0.3 percent in January. Economists had forecast the PPI would climb 0.3 percent. A 1.2 percent jump in goods prices accounted for nearly two-thirds of the increase in the PPI. Wholesale gasoline prices rose 6.8 percent. Food prices were up 1 percent.

READ: Gasoline, food boost US producer prices in February

In the 12 months through February, the PPI shot up 1.6 percent after advancing 1 percent in January. The report followed news on Tuesday that consumer prices increased strongly for a second straight month in February.

Excluding food and energy, goods prices rose 0.3 percent, matching January’s gain. This suggests that goods deflation, the major driver of lower inflation, was drawing to an end and services would need to pick up the slack in easing price pressures.

Services gained 0.3 percent in February after rising 0.5 percent in the prior month. A 3.8-percent increase in the cost of hotel and motel rooms accounted for a quarter of the rise in services prices. There were also increases in the costs of outpatient care and airline tickets. Portfolio management fees gained 0.2 percent after accelerating by 5.9 percent in January.

Personal consumption expenditures

These are among the components that go into the calculation of the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2 percent target.

Based on the CPI and PPI data, economists estimated that the core PCE price index increased 0.3 percent in February after gaining 0.4 percent in January. Core inflation is forecast to rise 2.8 percent in February, which would match January’s gain.

“The Fed will start its cutting cycle in June,” said Stephen Juneau, an economist at Bank of America Securities. “However, it will need to see more improvement in the upcoming inflation data to have enough confidence to begin to ease.”