By: Christine Cooper and Rafael De Anda, CoStar Economy
Consumers appear poised to pull back on, or at least slow, spending, the opposite of what is needed to keep the economy from falling into recession as the Fed raises rates this year.
Retail sales rose by only 0.5% in March over the prior month, according to the Census Bureau. Year-over-year growth slowed to just 6.9%, the smallest annual gain since December 2020 — just before the second and third round of pandemic-era stimulus checks were delivered.
Rising prices are clearly to blame for the slowing in overall retail sales. Gasoline prices were up by more than 18% in March, yet sales at gasoline stations grew by 8.9% over the month, meaning the amount of gasoline purchased fell. Consumers take quick note of higher gasoline prices as they’re quite visible, and the recent surge may be giving drivers pause when it comes to taking that extra road trip. Similarly, prices for food at home grew by 1.5%, but sales at grocery stores were up only 1%. Taking inflation into account, real retail sales declined by about 1.6%.
But this report showed a different trend taking hold as well — the shift away from online sales to in-person purchasing. Sales at nonstore retailers, such as Amazon and Wayfair, fell by 6.4% in March, their second monthly fall and first annual decline.
As COVID cases fall and shoppers are more comfortable visiting stores in person, the transition away from buying goods to consuming services is underway. In nominal terms, online sales now account for 13.1% of all retail sales, quite a drop from their peak in April 2020 of 17.3%, but still higher than pre-COVID days.
The shift to in-person shopping was to some extent evident in sales at brick-and-mortar stores across categories, including general merchandise stores, which saw a 5.4% increase in sales over the month, electronics and appliance stores, 3.3%, sporting goods and hobby shops, 3.3%, and clothing stores, 2.6%.
The only services category in retail sales is spending at restaurants and bars, which showed a fairly strong increase in March of 1% over the prior month, larger than its price inflation of 0.3%, meaning there was a pickup in actually eating (or drinking) outside the comfort of one’s own home.
The move toward more spending on services is expected to continue as the long pandemic streak of buying furniture, appliances and automobiles while hunkered down at home eases into more typical buying patterns.
Sales at car dealerships fell by 1.9% in March after two strong months of gains and despite a fall in prices. The drop was foreshadowed in a separate report from the Bureau of Economic Analysis announcing that March light vehicle sales fell for the second month in a row to 13.3 million units on a seasonally adjusted annual rate. This is still about 20% below average monthly sales in 2019. Limited inventories due to continued shortages and supply chain issues are the main drag on sales rather than weaker demand.
Whether online or in person, expectations are for consumer spending to remain solid despite easing in some categories in response to price increases. Households are seeing their spending habits strengthen , according to the Federal Reserve Bank of New York. The most recent data is for February but shows that consumers expect their spending to grow by 6.4% over the next year, a series high. This bolsters analysts’ views that the consumer is in pretty good shape financially and in good position to help support economic growth as the Federal Reserve raises rates to cool inflation. What We’re Watching … Mortgage rates are moving higher as the Fed plans its rate hike cycle. The rate on a conventional 30-year mortgage rose above 5% in recent days, according to the Mortgage Bankers Association. Along with still sky-high — and still rising — home prices, affordability is being pressured and is certain to dim prospects for some homebuyers. Builders are anticipating a slowdown in activity. The latest results of the National Home Builders Association survey marked the fourth consecutive month of falling confidence in the state of the housing market, according to builders themselves, with their views of buyer traffic, current sales and expectations of sales over the next six months all deteriorating in March. The association notes that the “market faces an inflection point.” That could be true, given the mixed news. Despite the souring sentiment, housing starts rose in March, a surprise, and data for the prior two months were revised higher. This might be a sign that supply chains are easing and construction workers are coming back to the job.
CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.
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