U.S. retail sales dropped by the most in nearly two years in January, likely because of frigid temperatures and moderation following hefty gains in the past four months, suggesting a sharp slowdown in economic growth early in the first quarter.

The larger-than-expected decline in retail sales reported by the Commerce Department on Friday was across the board. Economists speculated that rising prices and uncertain economic outlook amid confusion over tariffs on imports were forcing consumers to tighten their purse strings.

Pre-emptive buying in anticipation of tariffs that would raise prices for goods helped to boost retail sales in recent months. But consumer sentiment has deteriorated, with one-year inflation expectations hitting a 15-month high in early February as households perceived that “it may be too late to avoid the negative impact of tariff policy,” a University of Michigan survey of consumers showed last week.

“Maybe people are getting confused on the tariff story and think they are happening immediately and are therefore not even considering a purchase,” said James Knightley, chief international economist at ING.

“We will need to wait until the February data to see if this is the start of a more cautious consumer trend or indeed whether it was simply a weather-related pull-back,” he said.
Retail sales dropped 0.9% last month, the biggest decrease since March 2023, after an upwardly revised 0.7% increase in December, the Commerce Department’s Census Bureau said.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, dipping 0.1%. Retail sales increased 4.2% year-on-year in January. Much of the country was blanketed by snowstorms and freezing temperatures last month.
Wildfires in California could also have hurt sales.

A 25% tariff on Mexican and Canadian goods was delayed until March. An additional 10% levy on goods from China went into effect this month.

Spending underpinned

Sales at auto dealerships declined 2.8% after advancing 0.9% in December. Receipts at furniture stores fell 1.7% while those at clothing retailers decreased 1.2%.
Sporting goods, hobby, musical instrument and bookstore sales plunged 4.6%. Receipts at miscellaneous store retailers, including gift shops and florists, rose 0.2%.

Online store sales tumbled 1.9%. But receipts at food services and drinking places, the only services component in the report, increased 0.9% after edging up 0.1% in December.

Economists view dining out as a key indicator of household finances. Building material store sales fell 1.3%. Freezing temperatures were likely a drag. Receipts at service stations rose 0.9%. Electronic store sales dropped 0.7%.

Spending remains underpinned by labor market resilience, which is keeping wage growth elevated and the economic expansion on track. Household wealth is at record highs thanks to high house prices, though the stock market has ceded some gains.

Retail sales excluding automobiles, gasoline, building materials and food services declined 0.8% last month after an upwardly revised 0.8% jump in December.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast core retail sales would rise 0.3% following a previously reported 0.7% surge in December.

Robust consumer spending helped to offset the drag on GDP from inventories being nearly drawn down in the fourth quarter. The economy grew at a 2.3% annualized rate last quarter after expanding at a 3.1% pace in the July-September quarter.