Retail Sales Decline More Than Expected in January, Dampening Economic Outlook

Recent data released on Friday indicated a larger-than-expected decline in retail sales for the first month of 2025. According to Bloomberg data, headline retail sales dropped by 0.9% in January, surpassing the 0.2% decrease anticipated by economists. This represents the most significant month-over-month decline in retail sales since January 2024.

December retail sales were revised upward to 0.7% from the previous estimate of a 0.4% monthly increase, as reported by the Census Bureau. In a post on X, RSM chief economist Joe Brusuelas attributed the decline to "the traditional holiday hangover & a nasty winter freeze."

Excluding volatile categories, the control group used in the GDP determination for the quarter experienced an 0.8% reduction, falling short of the projected 0.3% increase. Sales excluding auto and gas declined by 0.5%, below consensus estimates of a 0.3% gain. Sporting goods and hobby sales decreased the most, with a 4.6% loss, followed by motor vehicle and parts dealers, which saw a 2.8% decline.

"If the February and March data are this weak, then we might see a negative GDP print for the quarter," commented Jefferies US economist Thomas Simons in a note to clients. "This is not our base case at all, but something shy of 2% seems very realistic."

The retail sales data release concluded a week of significant economic news updates. Earlier this week, inflation readings for January revealed higher-than-expected price increases. However, economists identified positive market and Federal Reserve developments within the data.

For categories within both the Consumer Price Index (CPI) and Producer Price Index (PPI) that influence the Fed's preferred inflation measure (Personal Consumption Expenditures index), economists anticipate a slowdown in price increases for January. "Core" PCE, excluding food and energy, is expected to show a decrease from 2.8% in December to 2.6% in January.

As of Friday morning, markets indicated less than a 50% probability of the Federal Reserve reducing interest rates before its July meeting, according to the CME FedWatch tool.