Reducing Recession Concerns

• Retail sales rose 3% in January, following declines in the two previous months.
• Details of the report were good, with strength across various segments.
• Consumers remain confident in early 2023 but PNC expects a mild recession, including a decline in consumer spending, later this year.

Retail sales jumped 3.0% in January from December, following declines in the two previous months. Details of the report were good, with sales excluding autos and gasoline up 2.6% for the month. The increase in retail sales, combined with the very strong January jobs report, reduce concerns that recession is imminent. Although some of the increase came from higher prices, more of it was from higher volumes.

Consumer spending was soft at the end of 2022, but the strong job market, solid wage growth, and slowing inflation are supporting household spending. Negatives include higher interest rates, the need to increase savings, and falling household wealth due to declines in stock prices and home values, although stocks are up somewhat in early 2023.

Overall growth continues to slow as the economy adjusts to higher interest rates. PNC expects a mild recession in mid-2023 as a result of ongoing Fed monetary tightening in an effort to slow inflation. Consumer spending growth will soften in the near term as the job market weakens and the drag from higher interest rates further weighs on the economy. PNC expects consumer spending, adjusted for inflation, to decline modestly in the second half of the year.

The increase in retail sales in January followed declines of 1.1% in November and December. Control retail sales-sales excluding autos, gasoline, restaurants, and building materials, and which go into nominal consumer spending in GDP-rose a solid 1.7% in January, following drops of 0.6% in November and 0.7% in December.

Sales growth was strong across segments in January. Sales of motor vehicles and parts jumped almost 6% as supply chain problems continue to ease, and despite higher interest rates on car loans. Sales of furniture and home furnishings rose more than 4% even with the contracting housing market. Restaurant sales were up more than 7% as consumers continue to dine out more as the pandemic recedes; this category is more discretionary than some others, so the increase is evidence that consumers are still feeling confident. Sales at gas stations were flat, despite higher prices.