Danske Bank

US: More Slowing of Consumer Spending

Overview:
Retail sales for February disappointed with a total decline of 0.6% m/m. Although much of the weakness was driven by non-core components, there was further evidence that real consumer spending is slowing, as households are bowing to a wide range of strong headwinds.

Details:
The weakness in the February retail spending report was exaggerated somewhat by non-core factors. Firstly, the Commerce Department reported another decline in autos sales (subtracting 0.4pp) although the unit sales figures applied by the BEA for the national accounts showed a minor rise in February. Secondly, gasoline sales declined 1.0% (subtracting 0.1pp); they have now risen substantially again. That said, the report was weak even when excluding these factors. Core retail sales (i.e. excluding autos, building materials and gasoline) were flat at 0.0%. With soft readings in prior months as well, the report therefore provides evidence of a further slowing in underlying retail sales. The three-month annualised growth rate in core sales has slowed to 1.1% - the lowest since 2003.

The report included a downward revision of 0.3pp to total December sales, partly countered by a 0.1pp upward revision to January sales. In terms of real personal spending this will imply a minor downward revision to real consumer spending in Q4 from 1.9% q/q AR to 1.8% q/q AR. Contrarily, real personal spending in January will be revised up from 0.0% m/m to 0.1% m/m. For February the report implies rougly flat real personal spending. This implies that even with another flat reading in March real consumer spending will see an increase of ½% q/q AR in Q1.
Assessment & Outlook:

There is little doubt that US households are currently suffering. A whole range of negative factors including high inflation, declining assets prices, tighter credit and a softer labour market is restraining consumers further. The outlook for consumers remains problematic for next few months until the tax rebate begins to kick in during late Q2. Read more on the prospects for consumer spending in our recent research paper "Research US: Consumers under siege".

For the Fed, today's numbers emphasise that the economy is slowing. The markets are now almost fully discounting a 75bp cut in the Fed funds rate at the meeting next week. Our current forecast stands at 50bp, but we doubt that the Fed will dare to disappoint the markets. We will reconsider our call in the edition of Weekly Focus due out tomorrow.

No doubt! Consumer spending is slowing down