Transitory Drop in Retail Sales

Retail sales fell 3.0% in February, reversing some but not all of the upwardly revised 7.6% surge in January. The upward revisions to January were extraordinary, moving from an initial estimate of 5.3% to a revised 7.6% gain; revisions are usually in tenths of a percent, not percentages. That means that stimulus checks played a much larger role than previously thought in supporting the rebound in spending in January and underscores the importance of emergency aid and stimulus a year after COVID knocked the economy off its rails.

The upward revisions to January were concentrated in restaurants, bars, vehicles, sporting goods stores and online retail. Gathering restrictions and case counts receded during the month, which allowed more people to step out.

The polar vortex and extreme weather that triggered widespread electricity outages and damage in the oil patch and the Sunbelt exacerbated the swing between January and February. Another round of stimulus checks is hitting consumer bank accounts now, at least; a portion will be spent in March. Some of that is going to show up in services.

Losses in February were broad-based but largely transitory. Vehicle sales alone dropped 4.2% during the month. Those losses were driven more by a drop in inventories than a pullback in demand. Supply chain disruptions, notably in computer chips, have forced the vehicle producers to cut production in recent weeks.

We saw sharp declines in online spending, furniture, appliances and spending at building and material stores. Those can be directly traced to harsh winter weather in the oil patch and the Sunbelt, which will also reverse next month.

Core retail sales, which feed directly into the calculation for real GDP growth, fell 3.5% for the month but are up at a double-digit rate from a year ago. Core retail sales rose an upward revised 8.7% in January. Overall GDP growth is now looking significantly stronger in the first quarter, especially with the tailwind of stimulus checks boosting spending again in March. Spending at restaurants in February faltered in response to the unusually harsh winter weather.

Spending at grocery stores held at the high level we saw in January. That is a relief, given the surge in hunger we saw before the December round of stimulus and emergency aid was passed. Much of that aid to the hardest hit families was slated to expire in mid-March.

Air travel in the most recent week hit the highest level since the onset of the crisis as euphoria over vaccines prompted more to book travel during spring breaks. The concern is social distancing and the UK variant, which is rising in dominance in Florida and Texas, both of which are now fully open.

Bottom Line
The consumer is back with lots of support, despite a setback in February. Revisions to January suggest that more of the initial stimulus was spent than we initially thought. Another round of stimulus checks looks like it is helping to spread spending from goods back into services - notably travel - in March. The key is to keep infections at bay so that resorts that reopened can stay open this time.

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