U.S. Retail Sales (February 2023)

Retail sales soften in February, meeting consensus expectations

• Retail sales declined 0.4% month-on-month (m/m) in February, bang on the median consensus forecast. January's reading was revised up to 3.2% (from 3.0%), balancing out today's loss. 
• Trade in the auto sector was weak, with sales at motor vehicle dealers declining by 1.8%, but from an upwardly revised reading of 7.1% in January (v. 5.9% m/m reported earlier). As we noted previously, this decline likely reflects seasonality distortions. Excluding autos, retail sales declined by 0.1%, on par with expectations. 
• Sales in other more volatile categories were also weaker in February. The building materials and equipment category fell 0.1% m/m while, sales at gasoline stations declined 0.6% m/m, despite stronger gas prices.
• Retail sales in the "control group" which excludes the above categories and is used as a gauge in the BEA's estimation of personal consumption expenditures (PCE), rose by 0.5% m/m from an upwardly revised 2.3% m/m growth in January (+1.7% m/m reported previously). This was above the consensus forecast for a decline of 0.3% m/m.
  • The largest contribution came from sales at non-store retailers (+1.6% m/m) and general merchandise stores (+0.5% m/m). Gains were also reported at food and beverage stores (+0.5% m/m) and health & personal care stores (+0.9% m/m).
  • The rest of the categories were in the red in February with the biggest losses coming from categories that had oversized gains last month: furniture stores, electronics & appliance stores (-1.5% m/m) and miscellaneous stores retailers (-1.8% m/m).
• Food services & drinking places – the only services category in today's report – was down 0.3% m/m, reflecting deceleration of demand growth as reported in the ISM Services.

Key Implications

• On the surface it looks like consumers stopped spending in February, but with upward revisions in January, an average nominal growth for this quarter is 8.6% (annualized). We think that this strength is attributable to warmer weather and expect more give back in March. Still, strong momentum puts our estimates of real consumer spending on track to advance by 3.0% (annualized) in the first quarter.
• This is the only official report on consumer demand before the FOMC members meet on March 21st. Looking at raw data in isolation, the Fed would have been deliberating on the choice between a 25- or 50-point rate hike. However, the collapse of the SVB and Signature Bank, which today transmitted to the global banking system, made financial stability equally, if not more important than price stability, shifting the debate to whether hike at all. We think that the Fed won't be able to ignore the recent acceleration in demand, which is ultimately helping to fuel price pressures, and will raise the policy rate by 25 basis points in March.    

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