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02:44 - Source: CNN
Minneapolis CNN  — 

Last year Americans knocked out their holiday shopping early, leading to frigid sales during the typically bountiful November and December months — and triggering speculation that the US consumer was tapped out.

That wasn’t the case. Last month, spending rebounded in a big way.

US retail sales surged in January by the most in almost two years, soaring 3% from December, the Commerce Department reported Wednesday.

Economists had anticipated sales would rise by 1.8%, after the 1.1% decline in December when consumers pulled back on spending amid high inflation and concern about the direction of the economy.

Instead the figures easily topped forecasts, making January the largest monthly sales bump since March 2021 when a third round of stimulus checks were cut.

“The increase in retail sales, combined with the very strong January jobs report, reduce concerns that recession is imminent,” Gus Faucher, PNC’s chief economist, wrote on Wednesday. “Although some of the increase came from higher prices, more of it was from higher volumes.”

The increases crossed all retail categories, with some of the largest jumps at department stores (17.5%), food services and drinking places (7.2%), and auto dealers (6.4%), according to the report.

Excluding autos and gasoline, sales were up 2.6% for the month.

The retail sales data is not adjusted for inflation. In January, the Consumer Price Index showed annual inflation fell by 0.1 percentage point to 6.4%.

A shop holds a sidewalk sale during an unseasonably warm day, Friday, Feb. 10, 2023, in Providence, R.I.

More work for the Fed

On a year-over-year basis, retail sales were up 6.4% from January 2022 when the Omicron variant was surging. Favorable weather, a strong labor market and post-holiday discounting helped contribute to the rebound in sales, economists said.

“Some of that strength was due to people coming back and buying things on discount, some of that strength was due to the fact we had an 8.7% increase in Social Security payments, which gave more cash to 66 million [people],” Diane Swonk, KPMG’s chief economist, told CNN this week.

“And people have more paychecks, no matter how you cut it,” she added. If they weren’t laid off like usual, they have more paychecks and more pay in the month of January.”

Factoring in inflation and the 0.4% increase in consumer goods prices in the January CPI report, Wells Fargo estimates that real retail sales rose 2.6%.

January’s blowout report is likely to underscore the Federal Reserve’s resolve to keep raising interest rates to cool demand as it tries to rein in inflation, economists say.

“The economy remains strong, unemployment is low, and that is what is going to keep inflation elevated,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, wrote in a note Wednesday morning.

“The Fed is going to need to raise rates higher — and hold them higher for longer — than people currently expect, and this is going to cause markets to go through some significant volatility,” he added, “as stock and bond markets are priced for benign scenarios and not the more difficult one that we are headed towards.”

The American consumer is still shopping

The latest data highlights the continued resiliency of the American consumer, Matt Schulz, chief credit analyst at LendingTree, told CNN.

“Americans overall have done a pretty good job of managing through some challenging times,” he said.

Consumers have been leaning more on credit cards for spending, he added, noting that while delinquencies are on the rise, “we haven’t seen them spike.”

In addition to drawing down extra savings during the pandemic, consumers have been helped by an easing in inflation and lower fuel prices, Mike Skordeles, head of US economics at Truist Advisory Services, said in an interview with CNN.

“In the back half of 2022, real incomes very much benefited from the sharp declines in gasoline prices,” he said. “That’s not a small thing to discount. It’s a couple hundred bucks on a monthly basis for the average person.”

Still, the spending spree is likely to wane as the Fed hikes continue to take their toll, Skordeles added.

“Particularly, the lower-end consumer and certain small businesses, they’re really hammered by higher interest rates,” he said. “That’s less about, ‘Oh, the Fed’s going to keep going.’ They’re already there, and they’ve been there for several months, and that’s cumulative.”

“That’s a rather big headwind, not just for retail sales, but for the economy as a whole,” Skordeles added. “There are a lot of dominoes that have already tipped.”