Retail Sales Slump, in Part Thanks to Lower Pump Prices

This morning, retail sales dropped 1.0% in March, surpassing the 0.5% decline expected according to?Bloomberg?and following a 0.2% decrease in February. Year-over-year, retail sales rose 2.9% in March, down from a 5.9% annual rise in February.

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Car sales fell 1.6% in March following a 1.3% decline the month prior, while gasoline stations sales dropped 5.5%, the largest monthly decline since April 2020. Excluding autos, retail sales fell 0.8% in March, but climbed 3.6% over the past 12 months. Excluding autos?and?gasoline, retail sales fell 0.3% but increased 6.0% year-over-year.

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In the details of the report, non-store retailer sales rose 1.9%, health and personal care sales gained 0.3%, miscellaneous sales and sporting goods sales both increased 0.2%, and eating and drinking sales rose 0.1% at the end of Q1. On the weaker side, general merchandise sales dropped 3.0% due to a 2.5% decline in department store sales, building materials sales decreased 2.1%, and clothing sales declined 1.7%. Also, furniture sales fell 1.2%, and food and beverage sales slipped 0.1% in March.

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Bottom Line:?Retail sales were disappointing in March, weakness in good part driven by declining energy prices reflecting somewhat weaker inflation rather than a lesser quantity of goods purchased.

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In fact, broadly speaking, with inflation falling – somewhat – in recent months, real spending was relatively resilient in Q1. Turning to a last drawdown in savings, credit card debt and a last sputtering of fiscal stimulus, coupled with a slower rate of price growth and improved income gains, a relatively stronger-than-expected showing in terms of consumer spending should leave growth positive across the first three months of the year, pushing out the outlook for a recession, until, as the Fed noted in this week’s minutes, the second half of the year.

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That being said, it is clear the consumer is far from robust, reeling from the pain of higher prices and borrowing costs. The wild volatility in spending in particular, while partly explained by seasonal adjustment variations, highlights a dramatic shift in the goods and services consumers are purchasing month to month, something consumers do when they are increasingly concerned about their financial footing.

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Also this morning, import prices declined 0.6% in March following a 0.2% decrease the month prior. Export prices, meanwhile, fell 0.3% at the end of the first quarter. According to the median forecast, import prices were expected to decline 0.1%, while export prices were expected to be flat (0.0%). Over the past 12 months, import prices declined 4.6% and export prices dropped 4.8%.

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Additionally this morning, industrial production rose 0.4% in March, more than the 0.2% gain expected and following a 0.2% increase in February. Capacity utilization, meanwhile, ticked up from 79.6% to 79.8% at the end of the first quarter, a four-month high.

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Also this morning, business inventories rose 0.2% in February, falling short of the 0.3% gain expected and following a 0.2% decline at the start of the year.

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Finally this morning, the University of Michigan Consumer Sentiment Index increased from 62.0 a reading of 63.5 in the preliminary April report, a two-month high. According to the median estimate on?Bloomberg, sentiment was expected to tick up to a reading of 62.1 at the start of the second quarter. In the details of the report, an assessment of current conditions rose from 66.3 to 68.6, and an assessment of future conditions increased from 59.2 to 60.3 in the preliminary April report, a two-month high.

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Yesterday, the PPI unexpectedly fell 0.5% in March, following a flat reading (0.0%) the month prior. According to?Bloomberg, the PPI was expected to be flat (0.0%) at the end of Q1. Year-over-year, producer prices rose 2.7% in March, less than the 3.0% increase expected, and the smallest annual gain since January 2021.

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Food prices rose 0.6%, following three consecutive months of decline, while energy prices dropped 6.4% in March following a 0.3% decline in February. Excluding food and energy costs, the core PPI declined 0.1% following a 0.2% gain in February. According to?Bloomberg, the core PPI was expected to rise 0.2%. Year-over-year, the core PPI increased 3.4% in March, as expected and following a 4.8% gain in February.

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Additionally, services costs fell 0.3%, due to a 0.9% decline in trade costs and a 1.3% drop in transportation and warehousing costs in March.

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Bottom Line:?This week’s cooler-than-expected monthly inflation report will reinforce the argument?the Fed can take a pause, while the Committee assesses?the full impact of earlier?policy metrics on the broader?economy and price pressures.?

That being said, while the Fed?certainly?could?choose to pause in May, the question remains?will?and?should?the Committee move to the?sideline? After all, while the headline print for both the CPI and PPI marks the slowest annual increase since 2021, both the CPI and PPI are still significantly more than the Fed's 2% inflation target. Furthermore, the declining?momentum of disinflation or lack of downside progress,?particularly?in the core, is not yet convincing?inflation will continue to abate.?

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According to the CME FedWatch Tool, the market is anticipating a 25bp rate hike at an 80% probability, while the probability of no rate hike in May is priced in at a 20% probability.

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Also yesterday, initial jobless claims rose 11k from 228k to 239k in the week ending April 8, a two-week high. According to?Bloomberg,?jobless claims were expected to rise to 235k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, declined from 1.82M to 1.81M in the week ending April 1.?

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Next week the economic calendar begins on Monday with the Empire Manufacturing Index and the NAHB Housing Market Index, the first of a series of housing market reports next week.

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On Tuesday, housing starts and building permits are expected to decline 2.8% and 6.1%, respectively, in March after rising 9.8% and 13.8%, respectively, the month prior.

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On Thursday, the existing home sales report will be released for March. The housing market has been under ongoing pressure as inflation and borrowing costs remain elevated, eating into consumers’ ability to not only buy everyday goods and services, but also larger ticket items, such as homes.

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And, finally, after a read on the Philly Fed Index on Thursday, the S&P Global national read on services and manufacturing activity will be released on Friday.

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?-Lindsey Piegza, Ph.D., Chief Economist?