US retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items, prompting analysts to downgrade their first-quarter economic growth forecasts. Despite signs of cooling in consumer spending, inflation pressures are steadily building, which should allow the Federal Reserve to raise interest rates next week. Other data on Wednesday showed underlying producer prices rose solidly in February, driven by strong gains in the cost of services such as hotel accommodation, airline fares and hospital inpatient care.
The sustained decline in retail sales is surprising as consumer confidence is at a more than 17-year high in the wake of a $15 trillion income tax cut package and a labor market that continues to churn out jobs. Economists said consumers boosted spending in the fourth quarter in anticipation of the lower taxes. "Looking at consumer fundamentals there appears to be nothing sinister going on among America's households," said Ellen Zentner, chief economist at Morgan Stanley in New York. "We posit that the anticipation of the widely publicized tax cuts pulled forward spending into the fourth quarter of 2017."
The Commerce Department said retail sales slipped 0.1 percent last month. January data was revised to show sales dipping 0.1 percent instead of falling 0.3 percent as previously reported. It was the first time since April 2012 that retail sales have declined for three straight months.
Economists polled by Reuters had forecast retail sales rising 0.3 percent in February. Retail sales in February increased 4.0 percent from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1 percent last month after being unchanged in January. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
As a result of the weak core retail sales at the start of the year, economists lowered their first-quarter GDP growth estimates. The Atlanta Fed slashed its forecast to a 1.9 percent annualized rate from a 2.5 percent pace.
Data forecasting firm Macroeconomic Advisers cut its estimate by four-tenths of a percentage point to a 1.7 percent rate, also taking into account revisions to January retail inventory data.
The economy grew at a 2.5 percent pace in the fourth quarter, the government reported last month. But revisions to December data on construction spending, factory orders and inventories have suggested the fourth-quarter growth estimate could be raised to a 3.1 percent pace. The government will publish its third estimate for fourth-quarter GDP growth later this month.
In a separate report, the Labour Department said a key measure of underlying producer price pressures that excludes food, energy and trade services rose 0.4 percent last month, matching January's gain.
That boosted the year-on-year increase in the so-called core PPI to 2.7 percent, the biggest gain since August 2014, from 2.5 percent in January. The increase in underlying wholesale prices supports views that consumer inflation will pick up this year.
The Fed has forecast three interest rate increases this year. Many economists expect the US central bank will raise its projection to four rate increases because of a robust labour market and firming inflation.
Economists believe that a tightening labor market, weak dollar and fiscal stimulus in the form of the tax cuts and increased government spending will lift inflation toward the Fed's 2 percent target this year. Auto sales fell 0.9 percent in February after a similar drop in January. There were also declines in sales at gasoline stations, furniture, health and personal care and electronics and appliance stores.
But there were some pockets of strength. Sales at building material stores surged 1.9 percent last month. Receipts at clothing stores gained 0.4 percent and sales at online retailers jumped 1.0 percent. Consumers also spent more at restaurants and bars and splurged on sporting goods and hobbies.