Is January’s Negative Retail Sales Growth a Warning Sign?

Frigid temperatures claim another victim — January’s retail sales. The U.S. Department of Commerce reported Thursday that retail sales totaled $427.8 billion last month, a decline of 0.4 percent. December’s sales figure was downwardly revised from a 0.2 percent gain to a 0.1 percent drop, making January the second consecutive month of negative growth. While cold weather has also been cited for weaker-than-expected job creation, economists were expecting January’s retail sales figure to post a gain of 0.2 percent. Even though it seems last month’s lower spending was not intimately linked to worsening economic trends, the drop does suggest that the economic momentum generated by consumer spending at the end of 2013 has lost steam in the new year.

JanRetail

U.S. Department of Commerce

January’s 0.4 percent decline was the biggest drop recorded in 10 months. Even when only the core measure of retail sales is considered – which excludes spending on automobiles, gasoline, and building supplies — the month’s growth was still weak. Economists believe that figure is a better proxy for Americans’ confidence in the economy because it does not include those volatile categories. But that measure remained unchanged compared with December’s figure, showing the impact inclement weather had on automobile dealers.

Overall, fewer American traveled to auto dealers and malls in the last month, and retailers felt the scarcity of consumers. As JPMorgan analyst Daniel Silver told CNBC, the late December expiration of unemployment benefits could also be a “factor weighing on sales.” Still, for the November 2013 through January 2014 period, retail sales increased 3.4 percent from the same period a year ago, and January’s retail sales figure represented an increase of 2.6 percent from last January.

Spending at clothing stores decreased 0.9 percent, while expenditures at department stores declined 1.5 percent. Purchases also fell 0.6 percent at furniture outlets and 1.4 percent at retailers of sporting goods, books, and music. However, spending at at electronics store, building materials outlets, gasoline stations, and grocery chains increased. More notably, McDonald’s (NYSE:MCD) — the world’s largest fast-food restaurant chain, has reported that sales at its established U.S. outlets fell for the third straight month.

To economists, the low January numbers pointed to slowing economic growth. “I don’t see the argument for why consumer spending will sustain a strong pace,” Pierpont Securities chief economist Stephen Stanley told Bloomberg. “I don’t see a dramatic improvement in the labor market. It is more of the same. I don’t see any big wage gains coming.” But just weeks ago, economists were describing how consumer spending was expected to strengthen in 2014 and drive greater economic growth.

Strong consumer spending is essential for the recovery of the American economy. Consumer spending accounts for approximately 70 percent of gross domestic product in the United States, and because government and business spending largely remained weak in 2013, the economy depended even more on household spending to fuel growth. Household purchases increased 3.3 percent in the fourth-quarter of last year, the greatest gain since 2010, and that growth pushed the economy to expand at a 3.2 percent annual rate in the final three months of 2013.

Early last year, it became clear that American consumers were keeping their purchases limited to immediate necessities as confidence in the economy — and the economy’s ability to created enough jobs to fill the gap left by the recession — remained weak. June posted the weakest pace of growth since January, and the month’s numbers showed that overall consumer spending had slowed from the start of the year. But by July, the trend began to change. While there was evidence that the economy had remained relatively weak after a tough spring, there was also proof that the economy was recovering from the hit it was dealt by January’s tax hike and March’s across-the-board federal spending cuts. Eventually, the improving economy slowly began to boost business confidence in the United States, which in turn prompted more companies to increase hiring. Better employment gains, combined with growing household wealth from the stock market rally and improving real estate values, put a significant number of higher-income Americans in the position to increase their outlays.

While the overall picture of consumer spending has been one of improvement, a closer view reveals more conflicting indicators about the health of the American consumer. Sales of big-ticket items like cars and houses were strong for much of last year, likely the result of pent-up demand, but spending was generally sluggish in retail stores and restaurants. That pattern suggests that American consumers were more confident purchasing longer-term “big ticket” items than they were increasing everyday expenditures.

Now, with the colder weather, even sales of automobiles are slowing. Sales slid 12 percent for General Motors (NYSE:GM) and 7.5 percent for Ford (NYSE:F) in January, while Toyota (NYSE:TM) and Honda (NYSE:HMC) also reported lower-than-expected numbers. Plus, stagnant wages and higher payroll taxes have affected spending for lower-income earners.

So far this year, wage growth has continued to be slow while unemployment remains stubbornly high, meaning households have been forced to dip into their savings in order to maintain spending. That reality can hardly be described as ideal for an economy heavily dependent on consumer spending for growth.

Job creation has also notably lost steam in the past few months, which is a problem for consumer spending. The relationship between business spending, job creation, and consumer spending is a close one. U.S. businesses do not want to increase labor costs unless they are consumers will spend money on the goods and services they produce. But consumers who are not confident about their job prospects are not likely to spend beyond everyday necessities. Last Friday’s Employment Situation Report from the Department of Labor’s Bureau of Statistics showed U.S. employers added only 113,000 jobs to payrolls in January — the second straight month of weaker-than-expected employment gains. With 113,000 jobs added to payrolls, job growth was not nearly as low as in December, but it was still significantly weak.

Federal Reserve Chair Janet Yellen has said the weather may be to blame for the past two weak job reports, although she did emphasize during her first Congressional testimony that it is too soon to jump to conclusions.

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