MNI POLICY: US Retail Sales Seen Recovering From Sharp Drop

A real-time indicator of U.S. retail sales from the Federal Reserve Bank of Chicago showed the surprise drop in retail sales for January turned more moderate into February, while inflation for retail goods and food services excluding autos picked up -- signs of slowing momentum in consumer spending as goods prices rebounded after falling in the latter half of 2023.

The newly relaunched Chicago Fed Advance Retail Trade Summary, or Carts, tracks the Census Bureau's official retail sales report on a weekly basis, providing an early snapshot of retail spending using multiple high-frequency consumer spending indicators including payment card transactions, retail foot traffic, gas sales and consumer sentiment.

The latest reading projects retail sales excluding motor vehicles and parts to fall 0.1% on a seasonally adjusted basis in February, and to fall 0.4% when adjusted for inflation. The Census Bureau reported a 0.6% drop in retail sales ex-auto in January, a surprisingly sharp decline though analysts noted widespread winter weather disruptions may have been a factor.

The Fed's Beige Book survey of regional business contacts in February reported a similar trend. “Consumer spending, particularly on retail goods, inched down in recent weeks,” it said Wednesday. "Several reports cited heightened price sensitivity by consumers and noted that households continued to trade down and to shift spending away from discretionary goods."

TURNING POINTS

The Fed bank's first version of its real-time retail sales indicator was created in March 2020 amid concerns over lagged official data releases and accuracy of Census Bureau survey results as a pandemic was sweeping the nation. Carts quickly garnered attention for providing substantially more accurate snapshots of consumption trends in lockdowns than private forecasters, who were also looking at similar payment card data but having difficulty with seasonal adjustments.

Its model exceled especially when data were volatile and special factors were in play, and like other real-time indicators can provide earlier indications of turning points in the business cycle. (See: MNI POLICY: Fed To Look To High Frequency Data In Shutdown)

Carts "1.0" was suspended in early 2022 after the loss of several data sources but relaunched last month using a broader set of data providers. Payment card data are still the most predictive of overall retail spending, but the addition of user-uploaded receipt data from consumer research firm Numerator that could offer insight into cash transactions not captured by credit and debit card data.

END OF GOODS DEFLATION?

Carts overshot retail sales ex-auto for January (it expected an increase 0.2%, compared to the 0.6% drop Census reported), but the weekly pattern picked up a marked softening in the second half of the month, consistent with the weaker-than-expected report.

Data in the first two weeks of February show a much flatter trend. Turn-of-the-year data have seen large revisions and been difficult to forecast since the pandemic due to shifting spending patterns and stimulus check effects.

Retail sales are mostly goods and are not adjusted for inflation. Carts also produces a weekly index of retail prices ex-auto, comparable to the BEA's chain-weighted price index, to offer an early estimate of inflation. It projects a BEA price index of 117.53 for February, a 0.4% rise from the prior month after four straight months of declines.

Inflation fell faster than the Fed expected last year in large part because goods prices turned lower, and officials are watching closely for any signs that will reverse.