CNN WIRE — Retail sales came in weaker than expected

By Bryan Mena, CNN

Washington (CNN) — Spending at US retailers last month was much weaker than expected, in a troubling sign that the American shopper could be starting to tap out.

Retail sales rose 0.2% in February from the prior month, the Commerce Department said Monday, up from January’s downwardly revised 1.2% decline. That was much lower than the 0.7% increase economists projected in a FactSet poll. The figures are adjusted for seasonal swings but not inflation.

President Donald Trump’s whipsawing trade spat with America’s biggest trading partners has spurred high levels of uncertainty among consumers and businesses. That skittishness has been evident across many consumer surveys and now shoppers seem to be adjusting their purchasing behavior accordingly. Retail sales account for about a third of overall spending in the US.

Weak consumer spending figures are adding to concerns that the US economy is slowing, and perhaps heading into a recession. Monday’s retail report didn’t ease those fears.

Spending last month declined the most at department stores (-1.7%), restaurants and bars (-1.5%) and at gasoline stations (-1%). Meanwhile, sales were up online and at health stores, rising 2.4% and 1.7%, respectively.

Monday’s report, however, wasn’t all bad news: Excluding sales at gas stations, car dealerships, of building materials and at restaurants — referred to as the “control group” — retail spending rose 1% in February on a monthly basis, according to the report, fully recovering from the 1% decline in January. That came in better than the 0.4% gain economists projected.

“With sentiment so poor, investors have been hoping the mighty US consumer provides reassurance that all is well on Main Street,” Jonathan Moyes, head of investment research at Wealth Club, said in commentary issued Monday. “They didn’t find it, with retail sales coming in lower than expected the US consumer is starting to look a little peaky.”

Retailers are sounding the alarm

Executives at America’s retail stores have recently warned of consumers feeling stretched and becoming cautious of their spending. Some stores have said they will need to raise prices if Trump’s trade war spirals out of control.

“Our customers continue to report that their financial situation has worsened over the last year as they have been negatively impacted by ongoing inflation,” Todd Vasos, chief executive of Dollar General, said last week in an an earnings call. “Many of our customers report they only have enough money for basic essentials, with some noting that they have had to sacrifice even on the necessities.”

Meanwhile, Walmart, America’s biggest retailer, expects sales and profit to slow this year. John David Rainey, the company’s finance chief, in an earnings call last month pointed to “uncertainties related to consumer behavior and global economic and geopolitical conditions.”

In addition to the health of the US consumer, retail executives also weighed in on how Trump’s tariffs could affect operations.

“We’ve never seen this kind of breadth of tariffs. This, of course, impacts the whole industry,” Best Buy CEO Corie Barry said on a call with analysts earlier this month. The company expects its vendors to pass along some tariff costs to retailers “making price increases for American consumers highly likely.”

On March 4, Trump imposed 25% tariffs on Mexico and Canada — then delayed those duties again after complaints from business leaders. That same day, Target CEO Brian Cornell told CNBC that Trump’s tariffs could quickly result in higher prices within days for fruits and vegetables imported from Mexico, adding that the tariff uncertainty could also hamper the company’s profits.

The Fed and the US economy’s many signals

America’s economic mood is souring, shoppers aren’t doling out like they used to and the housing market remains sluggish. At the same time, the US economy is facing the threat of higher inflation because of Trump’s tariffs.

The Federal Reserve, tasked with setting interest rate policy, is now making sense of somewhat of an economic puzzle. In January, the Fed held its key interest rate steady after delivering three back-to-back rate cuts last year. Traders are pricing in with near certainty that the central bank will stand pat again this week, according to futures.

Economists tell CNN the economy has been trending toward “stagflation” — a scenario in which growth flattens or declines as inflation accelerates.

Indeed, the Organisation for Economic Co-operation and Development said as much in a quarterly report released Monday, stating that “the new bilateral tariff rates will raise revenues for the governments imposing them but will be a drag on global activity, incomes and regular tax revenues.”

Officials have said in recent speeches that the prospects for economic growth still look good, despite the uncertainty sowed by the Trump administration’s flurry of policy changes.

Fed Chair Jerome Powell said earlier this month that officials are waiting for Trump’s policies, ranging from tariffs to mass deportations, to show up clearly in the economic data before central bankers can determine whether to keep rates unchanged, resume cutting, or hike again.