Retail sales fell 0.1% in February after being revised down fairly dramatically for the month of January, which had appeared to be a beacon of light amidst the battering Wall Street took at the start of the year when recession fears surged. Weakness was much more broad-based than expected, with declines posted in everything from motor vehicles, furniture and electronic equipment to general merchandise stores. Gasoline station sales also fell in response to lower prices at the gas pump.
Core retail sales, which strip out motor vehicle and gasoline station sales, held up somewhat better but were still off from a lower base in January. Spending at building materials and garden stores remained strong; that is by far the strongest category in retail sales, rising at a double-digit rate from a year ago. The problem is that we don’t know whether it is remodeling and actual additions to homes or just the replacement of appliances driving those sales; the categories are not broken down within the survey. Most builders have reported a pick-up in the remodeling market as many people who can’t afford to trade up have decided to add on to their existing properties, which have finally recovered some value.
The next strongest categories of spending when measured on a year-on-year basis are vehicles, which have been juiced by the return of subprime lending, and sporting goods, which include spending on guns as well as fitness gear. Restaurants are also holding up while gas prices remain weak. This is one place that the oil dividend has actually shown up over the last year.
Separately, the overall Producer Price Index (PPI) for final demand fell 0.2% in February. Falling energy costs accounted for almost the entire decline. The services component, however, continued to pick up during the month and posted the largest year-over-year increase since July 2015. Gains were once again concentrated in brokerage, dealing and investment advice, all traceable to the Federal Reserve’s December increase in interest rates.
Bottom Line: The consumer suddenly looks less healthy than a month ago, despite two better-than-expected employment reports. This, coupled with the quirk in the PPI related to liftoff by the Fed (as opposed to a surge in underlying demand), will add a note of caution to deliberations during the Federal Open Market Committee (FOMC) meeting over the next two days. We expect the FOMC to reduce the number of rate hikes in its forecast this year from four to three, then restart the clock on the second rate hike since liftoff, which we expect to occur in mid-June.
The economy continues to heal, but not fast enough for Main Street to really “feel good” about where we are. Most families still have a lot of ground to regain before feeling whole after the financial crisis. That is reflected in the anger we are seeing at the polls this year and is not likely to be rectified by November.