Consumer slowing down

Bottom line

Nominal retail sales in January plunged a much worse-than-expected -0.9% on a month-over-month (m/m) basis, marking its largest monthly decline since the -1.1% drop in March 2023. Last month’s devastating wildfires in Los Angeles (the second-largest metropolitan area in the US) and brutal winter weather across the country certainly contributed. But the threat of higher tariffs caused many businesses and consumers to accelerate purchases and stockpile goods before Inauguration Day, as retail sales in December were revised higher.

The frigid weather kept many consumers from visiting brick-and-mortar stores, yet online shopping also slipped 1.9% m/m, its worst one-month decline since 2021. That suggests the recent re-acceleration in inflation, decline in consumer confidence, the slimmest Social Security inflation adjustment in four years and the lowest savings rate in two years may have combined to pressure post-holiday spending.

Holiday spending was solid overall As defined as October through January, holiday spending in 2024 was solid, rising 3.9% year-over-year (y/y), compared with only 2.8% y/y in 2023—the weakest holiday spending in five years. The National Retail Federation (NRF) had forecast a 2.5-3.5% annual gain for 2024.

Why look at retail sales over four months? Most retailers begin to aggressively promote their Black Friday holiday deals in October, which pulls some Christmas sales forward into Halloween. November and December are the prime holiday shopping months, and January accounts for about two-thirds of post-holiday gift card redemptions, which only count as a retail sale when they’re redeemed, not when purchased. The NRF estimates that $28.6 billion in gift cards were purchased this holiday season, though 60% of US adults neglect to redeem their gift cards. Nearly 90% of gift-card recipients spend 30% more than their gift card’s face value when they do eventually redeem them.

January retail sales worse than expected Nominal retail sales in January declined by a much weaker-than-expected -0.9% m/m, well below consensus expectations for a -0.2% m/m decrease. December was revised up from a preliminary 0.4% m/m gain to a 0.7% increase, November was revised down a tick to a final 0.7% m/m gain, and October rose 0.6% m/m.

Control results, which strip out food, autos, gas and building materials (and feed directly into quarterly GDP calculations), declined by a worse-than-expected -0.8% m/m in January, compared with the expected consensus gain of 0.3%. December was revised up a tick to a gain of 0.8% m/m, November was unrevised at a final gain of 0.1% m/m, and October was breakeven. So, first quarter 2025 GDP has gotten off to a rocky start, as consumer spending accounts for 70% of GDP.

Sector details weak The divergence between spending on goods and services continued in January, as bars and restaurants (as a proxy for services) rose a strong 0.9% m/m. But motor vehicles & parts sales plunged -2.8% m/m. With mortgage rates more than doubling over the past two years from 3% to 7% and severe weather in January, furniture and building materials plummeted 1.7% and 1.3% m/m, respectively. In addition, sporting goods and clothing sales declined 4.6% and 1.2% m/m, respectively.

In January’s employment report, the Labor Department announced that 573,000 workers couldn’t work because of the brutal weather—a four-year high. Even though January is usually a bad-weather month, the average number of workers who can’t work in January because of cold weather over the last 50 years is 395,000. So, January 2025 resulted in 178,000 more job losses than normal. The inclement weather that forced many consumers to remain at home didn’t translate to good e-commerce sales, which fell -1.9% m/m. That suggests something more than bad weather negatively impacted January retail.

Social Security In its annual cost of living adjustment (COLA), the Social Security Administration increased payments by the slimmest increase in four years at 2.5% y/y in January 2025. That compares with 3.2% in January 2024, an outsized 8.7% COLA in January 2023 and 5.9% in January 2022. Retail sales in January tend to follow the size of the annual adjustment as it impacts the 72.5 million people (21% of the US population) who receive Social Security benefits.

Inflation re-accelerating Although the inflation rate has declined from its mid-2022 peak, progress has stalled in recent months. This is reflected in the prices of goods, which may have negatively affected January retail sales.

• The core wholesale Producer Price Index (PPI) doubled from 1.8% y/y in December 2023 to 3.6% in January 2025. 
• The core retail Consumer Price Index (CPI) declined from 3.9% y/y in December 2023, but it has stalled at 3.2-3.3% over the past eight months. 
• The core Personal Consumption Expenditure (PCE) index declined from 3.0% y/y in December 2023 but has stalled at 2.7-2.8% over the past six months.

Confidence is waning This might have dragged consumer spending down with it in January.

• NFIB Small Business Optimism Index soared from a 12-year low of 88.5 last March to a six-year high of 105.1 in December but slipped to 102.8 in January 2025.
• The Conference Board’s Consumer Confidence Index rose from 97.5 last April to 112.8 in November but has fallen to 104.1 in January 2025.
• The University of Michigan Consumer Sentiment Index rose from 66.4 last July to 74.0 in December but has dropped to 67.8 in February 2025.

Savings rate down The personal savings rate declined from a three-year high of 5.5% last January to a two-year low of 3.8% in December 2024, perhaps reflecting the post-election surge in optimism. But with business and consumer confidence easing and inflation rising recently, we could see the personal savings rate increase in coming months if consumers spend less and save more. This may have negatively impacted January retail sales.

Consumer bifurcation The US consumer, particularly at the lower end of the income and wealth spectrum, appears stressed. In the holiday period, luxury purveyors posted strong results but companies catering to lower-end consumers struggled.

Frugal February? Brutal winter weather has continued into February, and the lower-end consumer is hurting. Some consumers could remain on the sidelines this month, as they right-size their budgets and boost personal savings. Moreover, with a late Passover (April 12) and Easter (April 20) this year, March retail sales might get off to a sluggish start, before improving in April.