Retail spending dropped 1% in March

U.S. consumers have fewer and fewer options for stretching their budgets to shop at major chains. This is suggested by the most recent retail spending data, which showed a 1% decline in March. Macroeconomic conditions are weighing on household budgets and could worsen going forward.

It should be noted that this is the second consecutive month of cutbacks in retail consumer purchases. As a result, consumers appear to be becoming more cautious compared to the advance experienced in January. Uncertainty about a possible recession is weighing heavily on household budgets.

Thus, during March, spending fell by 1% from February. Compared to previous months, this is a considerable drop. For example, the previous month the decline was 0.2% and January saw an unusual increase of 3.1%.

This makes it clear that the aggressive measures of the Federal Reserve (Fed) are beginning to play their part in the sector. In any case, many specialists highlight the fact that the decline was much greater than expected.

The impact of inflation on the drop in retail spending

There are two fundamental causes for the retail sector to dramatically cut back on in-store spending. The first is the high inflation rocking the world’s leading economy from at least the second half of 2021. The second major factor is the Fed’s measures to curb uncontrolled price growth. In other words, both the cure and the disease are wreaking equal havoc on citizens’ wallets.

Although inflation is in the midst of a cooling process, this does not mean that it has stopped negatively affecting real wages. So far this year, the Consumer Price Index (CPI) has shown a pronounced downward trend in its pace. In January, year-on-year inflation stood at 6.4%. During the following month, the percentage increase was 6.0%. In the most recent Labor Department report for March, year-over-year inflation closed at 5.0%.

But despite this sharp freeze in the pace, prices remain well above the Fed’s 2% target. There are also potential threats to inflation resuming upward momentum in the coming months. One of these is the possible rise in oil prices, which would push fuel close to the $5 per gallon barrier again in the US.

It is worth mentioning that fuel prices were among the main drivers of inflation since 2021. Similarly, fuel also has an inevitable knock-on effect in dozens of markets. Under worsening conditions, the central bank would be forced to apply more aggressive measures to contain prices.

The impact on retail spending would then be much greater. Consumers would be forced to reduce their purchases as a result of the constraints imposed by the Fed’s prescription for lower prices.

The weight of the Fed’s monetary policies

The Federal Reserve has not been shy about reaffirming its irreconcilable stance on getting inflation to 2%. From its chairman, Jerome Powell, to state officials of all ranks, they insistently stress that they will do whatever it takes to bring inflation down. The central bank is even willing to allow a recession for the economy if that will allow it to meet that goal.

Since March 2022, the authorities have initiated an aggressive plan to raise interest rates in order to freeze economic growth. The main thrust of the measures is focused on tightening the labor market to slow the momentum of the retail sector. However, it took more than a year for the labor sector to begin to show the first cracks.

As a result of the timid drop in the growth of new payrolls, spending is already showing its limitations. In any case, the Fed remains committed to high rates throughout 2023. Thus, the central bank would not apply any rate cuts until 2024 at the earliest, when it will be sure that the measures have met the goal of freezing growth.

There are even officials within the central bank who are betting on additional rate hikes. If this course is taken, the federal funds rate could close near 6%, which would practically signal a recession. Such a scenario would become a nightmare for household budgets and would drive retail spending to a record low.

In the minutes of the recent Federal Open Market Committee (FOMC) meeting, it emerged that the central bank is bracing for the shock. It appears that the chances of a soft landing have been definitively buried and the coup de grace would have been the banking crisis of mid-March.

Figures under the spotlight

It is worth noting that the news of falling consumption can be seen as positive when talking about the Fed’s targets. However, for households it is much more dramatic. But there are also some points to keep in the spotlight, as much of the drop in consumption was condensed in some sectors, while in others there were positive numbers.

Specifically, service stations bore the brunt, with a drop in sales of -5.5%. There were also setbacks in dealerships, electrical equipment stores, household and garden goods. But when it comes to spending on products in online markets, it increased by 1.9% and 0.1% in establishments such as bars and restaurants.

Although March sales were -1%, if car dealerships and gas stations are excluded, the figures are less dramatic. Under those circumstances, retail spending is -0.3%.

According to economists quoted by AP, the U.S. economy could close the first quarter at 2%. However, if consumption, which accounts for two-thirds of GDP, continues to fall, growth will enter contraction for this second quarter.

Lydia Boussour of EY Parthenon was emphatic on this point when she commented to AP:

“The cumulative effect of historically high inflation, rising interest rates and reduced access to credit is already affecting consumers’ ability and willingness to spend.”

The expert adds that “the consumption engine” lost momentum during the first quarter and is preparing for what will be a tough second quarter.