In January, American consumers reduced their spending for the first time since August, as persistent inflation and severe weather took a toll on economic activity.
Retail sales dropped 0.9% from the previous month, according to data released by the Commerce Department on Friday. This marks a significant decline from December’s revised 0.7% gain and falls well short of economists’ predictions, which had anticipated only a 0.4% decrease. The figures account for seasonal variations but are not adjusted for inflation.
Spending declined across several sectors, with specialty stores and auto dealerships experiencing the most substantial drops at 4.6% and 3%, respectively.
At market open on Friday, U.S. stocks remained relatively unchanged, with all three major indexes increasing just 0.1%.
A key retail measure, known as the “control group,” which excludes more volatile components, fell by 0.8% in January. However, spending at restaurants, bars, and department stores remained positive.
US Federal Reserve Board Chairman Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs committee on “The Semiannual Monetary Policy Report to the Congress,” on Capitol Hill, in Washington, DC, on February 11, 2025.
Retail and food service sales make up about a third of total consumer spending in the U.S. With consumer spending driving approximately 70% of economic activity, its trends are closely watched.
Although inflation has significantly eased since reaching a four-decade high in the summer of 2022, it has recently shown signs of stagnation. This trend is a key factor in the Federal Reserve’s decision to pause further interest rate cuts after implementing three consecutive reductions last year.
Inflationary pressures could intensify if President Donald Trump follows through on his plan to impose 25% tariffs on Mexico and Canada starting March 1. Additionally, the administration is considering reciprocal tariffs in April.
Most economists argue that these tariffs would likely exacerbate inflation in the U.S., contradicting the administration’s assertion that foreign nations would bear the cost.
‘No cause for alarm’
Although the government’s retail data accounts for seasonal patterns, abnormally cold winters in recent years have disproportionately influenced consumer spending, particularly in January.
As a result, the latest figures may not fully reflect the overall state of consumer demand. Moreover, the January decline follows a robust increase in the previous month.
“The drop was dramatic, but several mitigating factors show there’s no cause for alarm,” said Robert Frick, corporate economist at Navy Federal Credit Union, in an analyst note on Friday.
“Some of it can be chalked up to bad weather, and some to auto sales tanking in January after an unusual surge in December due to fat dealer incentives. Especially considering December was revised up strongly, the rolling average of consumer spending remains solid.”
Additionally, last month saw intense wildfires in Los Angeles, which may have contributed to decreased consumer activity in the nation’s second-largest city.
“We will need to wait until the February data to see if this is the start of a more cautious consumer trend or indeed whether it was simply a weather related pull back and we get a subsequent big gain,” said James Knightley, chief international economist at ING, in commentary issued Friday.
Wall Street still sees no rate cut in March
Friday’s retail report does not change expectations for the Federal Reserve’s next move.
Wall Street remains confident that the Fed will maintain its current stance at the upcoming March 18-19 meeting, based on futures markets. The central bank opted to pause rate cuts last month, largely due to inflation data coming in hotter than anticipated and continued stability in the labor market, where unemployment remains low at 4%.
For the Fed to consider cutting rates again, it would need to see inflation moving decisively toward its 2% target, significant labor market weakening, or a combination of both, according to Fed Chair Jerome Powell’s testimony before Congress this week.
The biggest uncertainty for the Fed this year stems from Trump administration policies, including aggressive tariffs, large-scale deportations, deregulation, and proposed reductions to the federal workforce. The full economic impact of these measures remains uncertain.
“My view is until we have more clarity, it’s going to be impossible to make a judgment about where our policy should go and how fast and at what pace, and so we’re just going to have to get more information before we’re going to be able to move,” Atlanta Fed President Raphael Bostic said Wednesday at an event in Atlanta, referencing the administration’s policies. Bostic does not hold a voting role on monetary policy decisions this year.