Retail Sales Dive in January as Consumers Pull Back

Retail sales fell by 0.8% last month, far worse than expected, as consumers pulled back from their holiday spending and amid rising inflation and higher credit costs, the Census Bureau reported on Thursday.

December’s increase was also revised downward to a 0.4% gain from 0.6% previously.

Economists had forecast a drop of 0.1% to 0.3%

Although consumer spending has held up for longer than had been anticipated during 2023, there are concerns that the Federal Reserve’s campaign of higher interest rates to combat inflation could be having an effect on spending.

“Consumers pulled back on purchases for durable goods at physical stores but increased spending at restaurants and online,” said Jeffrey Roach, chief economist at LPL Financial. “From this report, we see that consumers are likely becoming more price conscious and perhaps, this is the first sign that the spending splurge is nearing the end.”

There continued to be a split between traditional retailers and online merchants. While overall retail trade sales declined, nonstore retailers were up 6.4 percent from last year. And consumers continued to spend on eating out, with food services and drinking places up 6.3% from a year ago.

Some private retail monitoring companies have seen better results than the government data.

In January, retail sales rose by 2.34% from a year ago, according to the NRF/CNBC Retail Monitor powered by credit card tracking firm Affinity Solutions, but sales were down by 0.16% from December’s strong performance.

Online outlets like Amazon outperformed more traditional retails stores, posting a 25.47% increase over January 2023 driven by a strong increase in spending in health and personal care items.

“In the face of fluctuating economic tides, 2024 is shaping up to be a year of strategic consumer adaptation, with spending increasingly channeled into health and personal care and online retail – the clear forerunners in a retail landscape where convenience and well-being take center stage,” said Jonathan Silver, founder and CEO of Affinity.

If there is a fly in the ointment, it is that consumers increasingly are using credit to power their spending, said Piyush Patel, chief strategic business development officer at online marketing firm Algolia.

“Notably, consumers are feeling strained by higher prices at the grocery store and beyond,” Patel said. “Collectively, Americans owe $1.13 trillion on their credit cards, according to a new report from the Federal Reserve Bank of New York. It seems the trend is continuing that consumers – especially millennials – are willing to take on additional debt and overextend in order to maintain their current lifestyles.”

However, credit experts say the debt to income ratios of most consumers are well below the peaks seen after the financial crisis of 2007 to 2009. And approximately half of credit card users pay their balances off each month.