American Consumers Show Signs of Weakness as Retail Sales Drop Sharply

People shop for bread at a supermarket in Monterey Park, Calif., on Oct. 19, 2022. Frederic J. Brown/AFP via Getty Images

The American consumer, whose willingness to spend drives the economy, showed signs of faltering in March as retail sales fell by 1 percent, a far sharper decline than analysts expected and five times lower than the prior month’s 0.2 percent pullback.

Consumer spending accounts for around 70 percent of U.S. economic output and retail sales serve as a key barometer.

“US consumer is pulling back,” said market analyst Charlie Bilello in a post on Twitter.

Retail sales fell for the second month in a row in March, data from the U.S. Census Bureau shows, with the 1 percent decline exceeding consensus forecasts of a 0.4 percent drop.

“After adjusting for inflation, though, the story is far worse,” Bilello added, noting that inflation-adjusted real retail sales fell 3.3 percent in year-over-year terms last month.

So-called core retail sales—which strip out automobiles, gasoline, building materials, and food services—fell 0.3 percent last month. This was after core retail sales grew 0.5 percent in February.

Core retail sales most closely correspond to the consumer spending component of gross domestic product (GDP).

Another measure of retail sales that excludes just automobiles fell by 0.8 percent in March after remaining flat in February.

The disappointing retail sales data reinforce concerns about the health of the U.S. economy.

‘Tough Sledding’ Ahead

Elon Musk predicted that the U.S. economy will be in for a hard slog until at least spring of 2024, joining a growing list of ominous warnings about America’s economic outlook.

“Tough sledding until spring next year is my best guess,” the Tesla CEO said in a Wednesday post on Twitter.

Musk was replying to a post about Federal Reserve economists predicting a “mild recession” later this year, followed by a gradual recovery over the next two years.

The Fed forecast came by way of minutes of the March Federal Open Market Committee, which showed policymakers highly focused on the banking sector turmoil sparked by the collapse of Silicon Valley Bank.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the minutes stated.

Soaring inflation forced the central bank to embark on an aggressive rate-hiking cycle that has led to a tightening of financing conditions for businesses and households, with the Fed noting that borrowing costs had “increased notably.”

Raising the benchmark interest rate that banks use to lend money to each other made consumer and business loans more expensive and harder to obtain.

‘Hard Landing’

Some economists have predicted that a credit squeeze is coming—if it hasn’t already arrived—and that its impact on the economy would be harsh.

Economist Mohamed El-Erian, president of Queens’ College, Cambridge, and adviser to Allianz and Gramercy, wrote in a Sunday op-ed in the Financial Times that “the flashing red light resulting from a speed-of-light run on the U.S. banking system, or what economists broadly refer to as financial contagion, is behind us.”

“Instead, red has become a flashing yellow due to the slower-moving economic contagion whose main transmission channel, that of curtailed credit extension to the economy, increases the risk not just of recession but also of stagflation,” El-Erian warned.

Economist Nouriel Roubini, who is nicknamed “Dr. Doom” for being one of the first economists to call the recession of 2008–09, warned of a “serious credit crunch for a good chunk of the U.S. banking system,” in a recent interview with Fox Business’s “The Claman Countdown.”

“The worst is ahead of us,” Roubini warned, noting that high inflation puts the Fed in a bind.

“Rates have to rise further because inflation is still well above target,” he said. “That’s going to cause a hard landing of the economy.”