American consumers have bad news for the economy
The strength of the US economy rests on the shoulders of consumers. If people are spending money, companies keep employees in their jobs and those workers keep spending. In theory, anyway.
Consumer spending accounts for about 70% of America's gross domestic product, the broadest measure of the economy, so it's nearly impossible to enter a recession when spending is growing.
Retail sales, which are adjusted for seasonality but not for inflation, fell by 1% in March from the prior month, the Commerce Department reported on Friday. That was steeper than an expected 0.4% decline, according to Refinitiv, and above the revised 0.2% decline in the prior month.
Investors chalk up some of the weakness to a lack of tax returns and concerns about a slowing labor market. The IRS issued $84 billion in tax refunds this March, about $25 billion less than they issued in March of 2022, according to BofA analysts.
That led consumers to pull back in spending at department stores and on durable goods, such as appliances and furniture. Spending at general merchandise stores fell 3% in March from the prior month and spending at gas stations declined 5.5% during the same period. Excluding gas station sales, retail spending retreated 0.6% in March from February.
However, retail spending rose 2.9% year-over-year.
Smaller tax returns likely played a role in last month's decline in retail sales, along with the expiration of enhanced food assistance benefits, economists say.
"March is a really important month for refunds. Some folks might have been expecting something similar to last year," said Aditya Bhave, senior US economist at BofA Global Research.
Credit and debit card spending per household tracked by Bank of America researchers moderated in March to its slowest pace in more than two years, which was likely the result of smaller returns and expired benefits, coupled with slowing wage growth.
Enhanced pandemic-era benefits provided through the Supplemental Nutrition Assistance Program expired in February, which might have also held back spending in March, according to a Bank of America Institute report.
A slowing labor market
Average hourly earnings grew 4.2% in March from a year earlier, down from the prior month's annualized 4.6% increase and the smallest annual rise since June 2021, according to figures from the Bureau of Labor Statistics. The Employment Cost Index, a more comprehensive measure of wages, has also shown that worker pay gains have moderated this past year. ECI data for the first quarter of this year will be released later this month.
Still, the US labor market remains solid, even though it has lost momentum recently. That could hold up consumer spending in the coming months, said Michelle Meyer, North America chief economist at Mastercard Economics Institute.
"The big picture is still favorable for the consumer when you think about their income growth, their balance sheet and the health of the labor market," Meyer said.
The latest consumer sentiment reading, released Friday morning, showed that sentiment held steady in April despite the banking crisis, but that higher gas prices helped push up year-ahead inflation expectations by a full percentage point, rising from 3.6% in March to 4.6% in April.
"On net, consumers did not perceive material changes in the economic environment in April," Joanne Hsu, director of the surveys of consumers at the University of Michigan, said in a news release.
"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," Hsu told Bloomberg TV in an interview Friday morning.
