Retail spending in the United States took a noticeable hit in March. Consumers pulled back on their spending as recession fears loomed larger, fueled by recent turbulence in the banking sector. Seasonally adjusted retail sales, though not accounting for inflation, dropped by 1% from February, a sharper decline than the forecasted 0.4% dip and the revised 0.2% decrease seen the month before.
Several elements played into this downturn, chief among them a reduction in tax refunds and worries about a cooling job market. The Internal Revenue Service handed out $84 billion in tax refunds this March, which is around $25 billion less than what was issued in March 2022. This shortfall in refunds led to lighter consumer spending at department stores and on durable goods like appliances and furniture.
Spending at general merchandise stores fell by 3% in March compared to February, and gas station sales dropped by 5.5% in the same period. Excluding gas station sales, retail spending still slipped by 0.6% from February. Yet, despite these monthly declines, retail spending was up 2.9% from the same time last year.
Economists point to the smaller tax returns and the end of enhanced food assistance benefits as key factors in March's spending slump. Aditya Bhave, a senior US economist at BofA Global Research, highlighted March as a crucial month for refunds, noting that some consumers might have expected similar returns to the previous year.
Moreover, the expiration of pandemic-era benefits under the Supplemental Nutrition Assistance Program in February likely played a role in restrained March spending. Wage growth has also decelerated, with average hourly earnings rising by 4.2% in March from a year earlier, down from a 4.6% increase in February. This marks the smallest annual rise since June 2021, according to the Bureau of Labor Statistics.
Labor Market and Economic Outlook
Despite these challenges, the US labor market remains relatively robust, though it's showing signs of losing steam. Employers added 236,000 jobs in March — a strong number historically, but smaller than the average monthly job growth over the past six months. The latest Job Openings and Labor Turnover Survey (JOLTS) showed that available jobs remained high in February, though down more than 17% from the peak of 12 million in March 2022.
Federal Reserve economists predict the US economy might tip into a recession later this year as the impact of higher interest rates becomes more evident. Even before the collapses of Silicon Valley Bank and Signature Bank, Fed economists had projected subdued growth with an increased risk of recession.
Consumer sentiment, tracked by the University of Michigan, worsened slightly in March during the bank failures, but had already shown signs of decline. The latest sentiment reading, released on Friday, indicated that sentiment held steady in April despite the banking crisis. However, higher gas prices pushed year-ahead inflation expectations up from 3.6% in March to 4.6% in April.
“On net, consumers did not perceive material changes in the economic environment in April, ” said Joanne Hsu, director of the surveys of consumers at the University of Michigan. “Consumers are expecting a downturn, they’re not feeling as dismal as they were last summer, but they’re waiting for the other shoe to drop, ” she explained in an interview with Bloomberg TV.
While the effects of the banking industry’s recent upheaval have been limited for consumers so far, the economic outlook remains uncertain. Michelle Meyer, North America chief economist at Mastercard Economics Institute, noted that the overall picture remains favorable for consumers when considering income growth, balance sheets, and the health of the labor market. However, the job market may cool further in the coming months, potentially impacting consumer spending.
