Last month, American consumers rebounded from a lackluster holiday shopping season by increasing their spending at stores and restaurants at the fastest rate in nearly two years, demonstrating the resilience of the economy in the face of rising prices and multiple interest rate hikes by the Federal Reserve.
The government reported on Wednesday that retail sales increased by 3 percent in January after falling for two consecutive months. It was the highest one-month gain since March 2021, when stimulus checks boosted spending significantly. Excluding the period of the pandemic, January’s increase was the biggest in almost two decades.
The increase was driven by a surge in auto sales as well as robust spending at restaurants, electronics retailers, and furniture stores. A portion of the supply difficulties that had hampered vehicle production have eased, and more automobiles are gradually reaching dealer lots. The increased inventories have allowed car dealerships to satisfy a greater portion of the nation’s pent-up demand for autos.
The excellent retail sales data released on Wednesday, along with the healthy employment report for January, show that the economy remains resilient, probably even strengthening, and poses little imminent risk of entering a recession. This week, Goldman Sachs experts decreased the probability of a recession this year from 35% to 25%.
However, robust consumer spending can potentially heighten inflationary pressure. The most recent measure of consumer inflation revealed a little deceleration year-over-year in January, but a steep increase from December to January.
The combination of robust expenditure and employment will likely increase pressure on the Federal Reserve to hike the benchmark interest rate further. The Fed has already stated that it anticipates two additional quarter-point raises, to a range between 5% and 5.25 percent, which would be the highest level in 15 years. On Tuesday, Deutsche Bank projected that the Fed will implement two additional rate hikes this year, bringing the range to 5.5% to 5.7%.
A portion of last month’s increase in retail sales was likely due to the exceptionally mild weather, which may have encouraged more people to buy automobiles, shop, and dine out. The government’s seasonal adjustment process undoubtedly also contributed to January’s increase. The purpose of its seasonal adjustments is to adapt sales statistics to regular calendar trends. A spending increase during the holiday shopping season followed by a decrease in January is one example.
“While the report suggests that consumers have regained their mojo, seasonal adjustment noise and milder winter weather in January account for a portion of the strength,” said Gregory Daco, chief economist at EY Parthenon. The stronger-than-expected result places consumption on a healthier basis at the start of 2023 and leads to solid, if sluggish, growth in consumer expenditure in the current January-March quarter.
The retail sales data revealed that restaurant expenditure increased by 7.2% in January and by more than 25% compared to a year earlier. The report on retail sales is not adjusted for inflation, thus a portion of the rise is due to rising pricing. The government’s inflation data indicates that restaurant costs have grown by 8% over the past year.
How well the economy performs will depend on whether or not Americans can continue to spend rapidly. The Fed’s eight interest rate increases over the past year have increased the costs of mortgages, vehicle loans, and credit card interest rates. Additionally, inflation has reduced workers’ wages, restricting their ability to spend freely.
There are indications that firms anticipate a more cautious customer. Coca-Cola, for example, reported on Tuesday that last year’s price increases had no effect on beverage demand during the October-December quarter. The company noted that it expected slower sales growth and a slower rate of price increases this year.
According to a Reuters article, PepsiCo stated that it has no plans for any price increases this year since it is uncertain that consumers will be able to afford them.
Despite all the obstacles they face, customers continue to demonstrate resilience. Several reasons undoubtedly contributed to last month’s increased spending. About 70 million beneficiaries of Social Security and other government pension schemes received an 8.7% cost-of-living increase to their benefit payments last month. It was the largest increase of its kind in forty years.
In January, approximately half a million new positions were added to the labor market. The unemployment rate fell to its lowest level since 1969, at 3.4%. With many businesses still keen to acquire and retain employees, average earnings and salaries have increased by roughly 5% over the past year – one of the fastest increases in decades.
Inflation has often eaten out these pay increases. Nonetheless, consumer price rises have slowed. And for many people, the substantial decline in petrol prices during the summer has liberated additional funds for spending.
The government said on Tuesday that inflation fell to 6.4% in January from 6.5% in December, marking the seventh consecutive monthly reduction. However, on a monthly basis, price rises accelerated in January compared to November and December, indicating that high inflation will not be eliminated fast or easily.
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