After comfortably outpacing expectations in February, retail sales took a step back in March, with a surprisingly poor result. Sales dropped 0.4% for the month, while sales excluding automobiles clocked in at the same rate. Sales ex autos and gasoline held up better, but still slipped by 0.1% for the month.
This is our third look at retail sales since higher payroll tax rates took a bite out of take-home pay for working households. Early on, consumers seemed to shrug off higher payroll taxes and lower take-home pay in the first few months of the year, and consumption measures proved surprisingly resilient. That changed in March.
Unseasonably cool weather likely played a role, but consumers may also still adjusting to the reality of lower discretionary income and the realization that tapping savings to increase spending may provide a bridge for a brief period, but isn’t an ideal solution over an extended period. Households may now be making some harder decisions and cutting spending at the margins.
The unexpected drop in sales should result in economists modestly reining in expectations for GDP growth for the quarter, but a rebound from the nearly flat results from Q4 of last year is still likely.
Overall, economic data has been mixed in recent weeks. The housing market continues to improve, but the recent jobs report surprised to the downside, as March nonfarm payrolls only improved by 88,000. Consumers continue to find themselves mired in a tough situation. Higher taxes, rising gas prices, lackluster income growth, and the potential effects of federal spending cuts all continue to weigh on consumer sentiment. At the same time, household debt service as a percentage of income is very low, suggesting that households have the capacity to borrow, should they muster the confidence to do so. Improvement in the housing market and strong stock market returns could also buttress sentiment.
As a whole, the economy appears to be sustaining its slow grind forward, while remaining susceptible to setbacks in an environment characterized by slow global growth.
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