Close-up of payment machine buttons with human hand holding plastic card near by
© Dmitriy Shironosov / 123RF Stock Photo

U.S. retail sales fell in February, as consumers pulled back their spending on building materials, groceries, furniture, electronics and clothing amid signs of a slowing economy.

The Commerce Department said Monday that retail sales fell 0.2% in February, after posting an upwardly revised gain of 0.7% in January. Over the past year, retail sales have roughly kept pace with inflation by increasing a slight 2.2%.

The recent dip in consumer spending suggests that more Americans are tightening their belts with global growth declining and as the stimulus from President Donald Trump’s tax cuts at the end of 2017 wane. Roughly 70% of all economic activity comes from consumers, so a slump in retail sales could cause a ripple effect.

On a three-month basis, average annualized sales track –2%—the weakest reading since the recession, said Katherine Judge, an economist at CIBC, in a report.

She called the three-month figure “especially troubling” given that the U.S. government shutdown ended in February, which saw a rebound in consumer confidence, and income growth had resumed.

Going forward, consumption will be supported by rising wages, she said, given that job gains will be harder to come by as the economy reaches full employment. Further, today’s data are “another signal that the Fed should remain on hold for this year,” Judge said.

In fact, CIBC forecasts a Fed rate cut in 2020, when fiscal policy tightens.

The drop in monthly retail sales didn’t much affect the U.S. dollar or short-term Treasury yields, said Derek Holt, vice-president and head of capital markets economics at Scotiabank, in a report. The market looked through the monthly miss, which was a result of January’s upward revisions, he said. Also, the market might be incorporating forward-looking considerations, such as an improving Chinese economy and trade negotiations, he said.

Holt made a case for a rebounding U.S. consumer later in the year, based on the U.S. personal savings rate. That rate peaked in December and, based on savings rate data from recent years, it could drop by late spring or early summer, resulting in “a sharp unleashing of pent-up consumption,” he said.

U.S. manufacturing activity increases

Countering retail sales data, U.S. manufacturers grew at a faster pace in March, as the pace of employment jumped and new orders and production improved.

The Institute for Supply Management, an association of purchasing managers, said Monday that its manufacturing index rose to 55.3 last month, up from 54.2 in February. Readings above 50 point toward an expansion in manufacturing. The sector has been reporting growth for 31 months.

ISM’s survey of companies for the index is a sign that economic growth should continue, even though the global economy, steel tariffs and the trade battle between the United States and China have been sources of concern.

In emailed commentary, CIBC chief economist Avery Shenfeld said the index reading is “at a level consistent with reasonable factory sector growth.”

The employment component of the index surged 5.2 percentage points, while new orders registered a 1.9-point gain and production notched a one-point increase.

Out of the 18 sectors surveyed for the report, 16 reported growth, including transportation equipment and primary metals. Only the apparel and paper product sectors reported declines.