The Line: Retail Sales Rose Less than Expected in February

Sales rose just 0.2% last month, well below the 0.6% forecast. This data looks even worse if you consider the following:

Retail sales are not adjusted for inflation, and since prices rose 0.2% in February, sales didn’t really rise, they just kept up with inflation.
January’s decline in retail sales was revised from -0.9% to -1.2%. You would expect a bigger rebound than 0.2% after such a weak January figure.

That said, there actually was some good news in the report. Sales of items in the “control group” rose a higher-than-expected 1% last month. What’s in the “control group” and why is it so important? The control group excludes sales at auto dealers, building materials retailers, gas stations, office supply stores, mobile homes and tobacco stores. It’s important because control group retail sales are used to help calculate the consumer spending component of GDP.

To sum up:

February retail sales were weak, especially after January’s decline.
Consumer sentiment just fell to its lowest level since 2022.
When consumers are worried about the future they spend less money.
Since consumer spending is about 70% of GDP, we could see negative economic growth in the first quarter of 2025.

The Fed Doesn't Touch Rates, But is More Pessimistic About the Economy

As expected, the Federal Reserve left rates alone at their meeting this week. They did, however, make notable changes to their economic outlook which included:

Lowering their GDP forecasts for 2025, 2026, and 2027 to under 2% each year.
Raising their inflation projections for 2025 and 2026.

They still plan to cut rates twice this year, for a total of 50 basis points.

So, when will inflation finally reach their 2% target? They still say 2027, but who really knows at this point. During his press conference after the meeting, Jerome Powell was asked about the impact of tariffs on prices and used a word we never expected him to say again: transitory. You’ll remember that while prices were rising sharply during the pandemic, chairman Powell said inflation would be “transitory” and come down once supply chain issues improved. He was wrong then, but only time will tell how “transitory” any inflation due to new tariffs will be.