HG MARKETS:

In January, U.S. retail sales experienced a significant drop, surprising many as harsh winter weather impacted consumer activity. The Commerce Department reported a 0.9% decline in sales, a sharp contrast to December’s revised increase of 0.7%. Economists had predicted only a slight dip of 0.1%, making the actual figures a notable disappointment. Severe winter storms and freezing temperatures kept many consumers away from stores and auto dealerships, contributing to the downturn. Additionally, California wildfires may have played a role in the regional decline.

Beyond the weather, part of the decrease seems to be a reaction to earlier months of strong consumer spending, where many shoppers made purchases in advance to avoid anticipated tariff increases. The uncertainty surrounding trade policy also affected retail patterns. A 25% tariff on Mexican and Canadian goods, expected earlier, was postponed until March, while a 10% tariff on Chinese goods took effect in January. These factors likely led households to make early purchases in late 2023 to sidestep possible price hikes.

Core retail sales, which exclude autos, gasoline, building materials, and food services, also declined by 0.8% in January, wiping out December’s 0.8% gain. This measure closely follows the consumer spending portion of GDP, raising concerns about potential impacts on economic growth in the first quarter. Economists had forecast a 0.3% rise in core sales, further highlighting the unexpected nature of the slowdown.

Despite this setback, consumer spending is still supported by a strong labor market and high household wealth, especially from elevated home values. However, with ongoing tariff uncertainties and weather disruptions, the short-term outlook for retail sales appears cautious. February’s retail data will be crucial to determining whether this is a temporary weather-related issue or a sign of weakening consumer demand.