Retail sales shrink as consumers pull back on spending

When the going gets tough, Americans go shopping. That's unless would-be shoppers get rattled, which seemed to be the case in March, with retail sales undershooting forecasts.

Some economists said the 0.3 percent decline in purchases raises concerns about U.S. economic growth, given that consumers are the biggest driver of spending. Still, many analysts believe the dip will prove temporary, so long as the labor market holds up and wages continue to gain traction.

"The only thing that is really on track is consumer spending, and we got a bit of a soft number in that category today," said Jim Russell, principal and portfolio manager at Bahl & Gaynor Investment Counsel. "We're very heartened by the fact that the employment statistics remain good."

The jobs market has remained positive, with U.S. companies adding 215,000 employees in March after a 245,000 gain the previous. The jobless rate inched up to 5 percent as more Americans looked for work and paychecks expanded, with average hourly earnings up 7 cents to $25.43, after a two-cent decline in February.

Beyond consumer spending, which drives roughly 70 percent of economic activity, other factors such as government spending, business capital expenditures and exports have been lackluster, making it that much more crucial that Americans keep purchasing.

"This represents a minor disappointment -- we'll have to see if this gets extended into the spring," added Russell of Wednesday's figures from the Commerce Department, which had nine of 13 main categories increasing, but not enough to deflect declines in auto sales, clothing and restaurants.

The rise in gasoline costs are part of the equation, with the national average rising to $1.94 a gallon in March, up from $1.73 the prior month. Prices at the pump "worked as a major headwind," said Russell. "Gasoline prices and spending at restaurants and bars correlate very well."

Sales at auto dealerships fell 2.1 percent in March; excluding autos, retail purchases climbed 0.2 percent after remaining essentially flat in February. Sales at service stations reflected the increased cost of gas, up 0.9 percent. Retail sales excluding autos and gas rose a meager 0.1 percent, also less than forecast. So-called control sales, which exclude autos, gas, food service and building materials, and which are factored into GDP, rose 0.1 percent in March from the month before.

While the increase in control group sales "was on the weak side in March, upward revisions to prior months mean that the balance of risks to our estimate that first-quarter real GDP growth was 1 percent annualized are now tilted slightly to the upside," Steve Murphy, U.S. economist at Capital Economics, wrote in a note. "With employment gains still healthy and real incomes growing at a solid pace, we expect real consumption growth to rebound further over the first half of the year."

Some analysts attributed the lackluster growth in retail sales in recent months to consumers saving more money after get spooked by stock market turmoil earlier this year. IHS economist Chris Christopher estimates the savings rate rose to 5.4 percent in the first quarter, up from 5 percent in the final three months of 2015.

"We expect real consumer spending growth to pick up to a 3.1 percent rate for the last three quarters of the year, since consumer fundamentals are looking rather strong," Christoper wrote in a note. "However, there is considerable downside risk to our consumer outlook -- especially if the stock market goes into a tizzy again."

On Wednesday, investors bypassed the surprise dip in retail sales to focus on signs of stabilization in China's economy, as well as better-than-expected quarterly results from JPMorgan Chase (JPM), with stocks surging to a four-month high.

Economists had varied takes on what the figures will ultimately mean for quarterly and yearly GDP.

"With expectations for topline activity in Q1 previously downgraded after back-to-back months of negative retail spending at the start of the year, this morning's confirmation of a third consecutive month of absent consumer activity will no doubt prompt a further downward revision to first-quarter growth, potentially into negative territory," Lindsey Piegza, chief economist at Stifel Nicolaus, wrote in a note.

"The first quarter looks soft, but we should bounce back in the second quarter," said Gus Faucher, deputy chief economist at PNC Financial, who projects a "solid, not fantastic" year, with economic growth of about 2 percent.

The Federal Reserve Bank of Atlanta forecasts 0.1 percent growth for the first quarter. Other economists also expect weak GDP for the period, which has proved weak over the last few years.

"We look for a 2-to-2.5 percent range for the United States," said Russell of expectations for GDP in 2016. "Today's numbers are kind of consistent with that outlook."