US Retail Sales Tick Up as Economic Uncertainty Grows

US retail sales edged up in February, signaling a cautious consumer and growing economic uncertainty, Reuters reports. While the modest increase suggests continued economic growth, the slowdown in discretionary spending highlights mounting concerns.

The Commerce Department's report, released Monday, indicates a moderate pace of economic expansion in the first quarter, but paints a picture of wary consumers. Sales at restaurants and bars experienced their largest decline in 13 months, reflecting softening consumer sentiment.

"This report should alleviate concerns that the economy already is shrinking," said Samuel Tombs, chief US economist at Pantheon Macroeconomics. "But the risk of much weaker growth, as consumers seek to rebuild a savings buffer in response to concerns about job security, now looks elevated."

Total retail sales rose 0.2% last month, following a downwardly revised 1.2% drop in January, which marked the largest decline since November 2022. Economists had projected a 0.6% increase for February.

The year-over-year increase in sales reached 3.1% in February. Online sales surged 2.4%, while health and personal care stores saw a 1.7% jump. Building material and garden equipment sales also edged up by 0.2%.

However, sales at auto dealerships fell 0.4%, following a 3.7% drop in January. Furniture store sales remained unchanged, while clothing and electronics retailers experienced declines of 0.6% and 0.3%, respectively.

Receipts at food services and drinking places, the only services component in the report, fell by 1.5%. This marked the largest decrease since January 2024, following an unchanged reading in January. Economists view dining out as a key indicator of household finances, and some believe cold weather may have kept people at home. Lower gasoline prices also contributed to a 1.0% decrease in sales at service stations. Sales in sporting goods, hobbies, musical instruments, and bookstores dropped by 0.4%.

The stock market reacted positively to the news, while the dollar weakened against a basket of currencies. Longer-dated US Treasury yields dipped, while shorter-dated yields rose.

With consumer sentiment plunging to a near two-and-a-half-year low in March, sales could struggle in the coming months. President Donald Trump's tariffs, which have sparked a trade war, have raised concerns about inflation, job losses, and income erosion, all of which could dampen consumer spending. Mass layoffs of public workers as part of the Trump administration's efforts to shrink the federal government are also expected to negatively impact spending.

Retailers, including Kohl's, Macy's, Walmart, and Target, have already lowered their sales expectations amid rising inflation and recession fears related to the tariffs. Bank of America card data revealed early signs of softening discretionary spending, particularly at restaurants, in the Washington D.C. metropolitan area in February. A potential stock market selloff, primarily affecting high-income households, and rising food prices could further squeeze low-income households.

Treasury Secretary Scott Bessent warned earlier this month that the economy might slow as it transitions from public spending to more private spending, calling it a "detox period." On Sunday, Bessent acknowledged that there are "no guarantees" that the US will avoid a recession.

The Federal Reserve, meeting on Tuesday and Wednesday, is expected to hold the benchmark overnight interest rate steady at 4.25%-4.50%, having already reduced it by 100 basis points since September. The Fed will continue to assess the economic impact of the Trump administration's policies. Financial markets anticipate that the Fed will resume cutting borrowing costs in June after pausing its easing cycle in January.

"The Fed is in a bind as it will have to balance the risks of a slowing economy and consumer against the possibility that sizable tariffs could stoke another round of inflation in the months ahead," said Scott Anderson, chief US economist at BMO Capital Markets. "Today's retail sales data signals growing consumer distress, but not clear-cut recessionary behavior."

Core retail sales, which exclude automobiles, gasoline, building materials, and food services, increased by 1.0% in February. This aligns more closely with the consumer spending component of gross domestic product and follows a downwardly revised 1.0% decline in January. Economists anticipate consumer spending growth to slow to as low as a 1.2% annualized rate this quarter, compared to the robust 4.2% pace in the October-December quarter.

The Atlanta Fed is currently forecasting a 2.1% contraction in GDP this quarter, but most economists' estimates range from a tepid 0.5% growth rate to a high of 1.3%. The economy grew at a 2.3% pace in the fourth quarter.

However, rising inventories as consumer spending slows could