Retail Sales Unexpectedly Drop for Third Straight Month

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Inside A Hallmark Cards Inc. Gold Crown Shop Ahead Of Retail Sales Figures
Luke Sharrett/Bloomberg via Getty Images
By Lucia Mutikani

WASHINGTON -- U.S. retail sales unexpectedly fell for a third straight month in February as harsh weather kept consumers from auto showrooms and shopping malls, tempering the outlook for first-quarter growth and a June interest rate increase.

Even accounting for the snowy and cold weather, which blanketed much of the country in late February, there is little doubt that consumer spending has slowed significantly after robust growth in the fourth quarter. Consumer spending accounts for more than two-thirds of U.S. economic activity.

"This report points to a surprisingly bigger weather impact on spending activity than previously thought. The weakness in spending could potentially complicate the case for a mid-year hike by the hawkish members of the Fed," said Millan Mulraine, deputy chief economist at TD Securities in the New York.

The Commerce Department said Thursday retail sales dropped 0.6 percent as receipts fell in almost all categories. Sales had declined 0.8 percent in January.

It was the first time since 2012 that sales had dropped for three consecutive months. Economists had forecast retail sales increasing 0.3 percent last month.

The Federal Reserve had been widely expected to remove a reference to being "patient" in deciding when to raise rates at next week's two-day meeting, putting a June rate increase in play.

Some economists and traders think the U.S. central bank may want to wait longer to be certain any weakness early in the year was temporary. The cool-off in economic activity has been blamed on the bad weather and the now-settled labor dispute at the country's West Coast ports, which disrupted the supply chain.

Stocks on Wall Street were trading higher, while the dollar fell against a basket of currencies. Prices for longer-dated U.S. Treasury debt rallied.

Weak Sales vs. Strong Labor Market

Retail sales excluding automobiles, gasoline, building materials and food services were flat after a downwardly revised 0.1 percent drop in January. The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Core retail sale have been downbeat since December. February's weak reading and January's revision prompted economists to cut their first-quarter GDP growth estimates by as much as 0.6 percentage point to as low as a 1.2 percent annual rate.

The economy grew at a 2.2 percent pace in the fourth quarter. With the labor market rapidly firming, the moderation in growth is likely to be temporary.

Drop In Claims

A separate report from the Labor Department showed initial claims for state unemployment benefits declined 36,000 to a seasonally adjusted 289,000 for the week ended March 7.

That was well below economists' expectations for a drop to only 305,000 and unwound much of the prior two weeks' increases, which had pushed claims well above the 300,000 mark.

Economists are confident economic activity will accelerate in the second quarter of the year, also as consumer spending gets a tailwind from the massive savings from the lower gasoline prices in late 2014 and early this year.

Most believe consumers saved the bulk of the windfall from cheaper prices at the pump and expect the money to be spent starting in March as temperatures warm up.

"Consumers may have throttled back spending, but they maintain the ability and means to spend," said Jack Kleinhenz, chief economist at the National Retail Federation. "With the onset of warmer, spring-like temperatures and an earlier Easter, consumers will likely shake off the winter chills."

The weakness in sales last month was fairly broad-based, underscoring the impact of the weather.

Autos Sales Fall

Automobile sales tumbled 2.5 percent, the largest drop in a year. Sales at clothing stores were flat. Receipts at building material and garden equipment stores fell 2.3 percent, the biggest decline since May 2012.

Sales at restaurants and bars slipped 0.6 percent, the largest fall in a year. There were also declines in furniture and electronic and appliances sales.

Receipts at online stores, however, rose as did sales at sporting goods and hobby shops.

A recent rise in gasoline prices lifted receipts at service stations, where sales rose 1.5 percent, the first increase since May. Gasoline prices rose about 9 cents in February.

Prices at the pump had been dropping since July last year in tandem with falling crude oil prices.

9 Numbers That'll Tell You How the Economy's Really Doing
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Retail Sales Unexpectedly Drop for Third Straight Month
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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