U.S. retail sales growth slowed to 0.3% in February

Consumers moderately curbed spending in February: Is this just the beginning?

Following strong retail sales in January, consumers cut back on spending in February. Monthly retail sales squeezed out a modest gain in the month of February, according to Wednesday’s Commerce Department report.

But while February’s 0.3% growth rate did not come close to January’s 4.9% surge, that’s not the full story. The slowdown can likely be attributed to an expected pull back after such as rapid pace to start the year. In fact, retail sales nearly met market expectations of a 0.4% increase, as impending headwinds to economic growth had yet make their mark.

COVID-19 recovery creates pockets of strength

Despite the cooling period, the latest report shows improving COVID-19 conditions driving relatively normal consumption in multiple categories of goods and services.

The largest gains in February occurred in gas station sales, which increased 5.3% amid consumers resuming pre-Omicron surge activities and rising energy prices.

Consumers also spent more at restaurants and bars as COVID-19 fears began to fade. Sales rose 2.5% after a slow previous two months.

The largest decline occurred in non-store (online) sales, which fell by 3.7% in February. We consider this a predictable stall after a record January surge of more than 20%.

Calm before the storm?

Despite record gas prices and persistent high inflation, consumers did not significantly restrain retail spending last month, but it remains to be seen what kind of blow these disruptions will deal to consumers’ wallets going forward.

It’s important to note that a good portion of the February retail sales data was collected prior to the February 24^th invasion of Ukraine by Russia and the ensuing war. At the time gas prices were still relatively well behaved, costs at the pump have since jumped from $3.32/gallon to $4.31/gallon, likely taking a bigger bite out of household budgets and pinching consumers over the coming months.

The exact impact of current economic and geopolitical forces on consumer behavior remains an open question. It will also be a key driver of if and how much the Federal Reserve increases interest rates this year.