America’s consumers rebounded last month from a weak holiday shopping season by boosting their spending at stores and restaurants at the fastest pace in nearly two years, underscoring the economy’s resilience in the face of higher prices and multiple interest rate hikes by the Federal Reserve.
The government said Wednesday that retail sales jumped 3% in January, after having sunk the previous two months. It was the largest one-month increase since March 2021.
Driving the gain was a jump in car sales, along with healthy spending at restaurants, electronics stores and furniture outlets. Some of the supply shortages that had slowed auto production have eased, and more cars are gradually moving onto dealer lots. The enlarged inventories have enabled dealers to meet more of the nation’s pent-up demand for vehicles.
Wednesday’s robust retail sales figures, along with a strong January job report, suggest that the economy remains durable, perhaps even strengthening, and at little risk of succumbing to a recession anytime soon. Earlier this week, economists at Goldman Sachs reduced the likelihood of a recession this year from 35% to just 25%.
Brisk consumer spending, though, can also intensify upward pressure on inflation. The latest measure of consumer inflation showed it declined slightly on a year-over-year basis in January but rose sharply from December to January.
The combination of solid spending and hiring will also likely raise pressure on the Federal Reserve to raise its benchmark interest rate even further. The Fed has already signaled that it expects to carry out two more quarter-point hikes, to a range of 5% to 5.25%, which would be the highest level in 15 years. On Tuesday, Deutsche Bank said it expected the Fed to add two additional hikes on top of that this year, to a range of 5.5% to 5.75%.
Wednesday’s retail sales figures showed that spending at restaurants soared 7.2% in January, an increase that, in part, might have reflected warmer-than-usual weather. In the past year, restaurant spending has leapt more than 25%. The retail sales report isn’t adjusted for inflation, so some of that increase reflects higher prices. According to the government’s inflation report, restaurant prices have increased 8% in the past year.
Whether America’s shoppers can continue to spend briskly will help determine how the economy fares. The eight interest rate hikes the Fed has carried out in the past year have raised the costs of mortgages and auto loans as well as credit card interest rates. Inflation has also eroded workers’ paychecks, thereby limiting their ability to spend freely.
Yet for all the challenges, consumers continue to show resilience. Several factors likely helped propel last month’s spending. About 70 million recipients of Social Security and other government pension programs last month received an 8.7% boost in their benefit checks, an annual cost-of-living adjustment to offset inflation. It was the largest such increase in 40 years.
The job market also surged in January, with nearly a half-million new jobs added. The unemployment rate reached 3.4%, its lowest level since 1969. With many businesses still eager to hire and keep workers, average wages and salaries have risen about 5% from a year ago — among the fastest such rates of increase in decades.
Those raises have generally been eaten up by inflation. Still, consumer price increases have been slowing. And for many households, a sharp drop in gas prices since summer has freed up more money to spend.
As price increases have slowed, average wage gains have surpassed inflation in some months, lending some consumers additional spending power.
On Tuesday, the government reported that inflation eased again in January compared with a year earlier, the seventh straight such decline, to 6.4% from 6.5% in December. But on a month-to-month basis, price increases accelerated in January compared with November and December, evidence that high inflation won’t be defeated quickly or smoothly.