Retail Sales January 2025

Consumers take a post-holiday breather

The January retail sales report showed a larger-than-expected pullback in spending at the start of the year as consumers took a breather after the holiday shopping season. Retail sales figures tend to be volatile at the turn of the year. Looking through the noise, the consumer picture still looks fundamentally healthy, though we expect spending momentum will cool further as softer labor market conditions and still-elevated prices and rates constrain households’ spending power.

Retail sales declined more than expected last month, 0.9%, while the December gain was revised higher to 0.7% from 0.4% previously. Adjusted for inflation, the volume of sales fell 1.3%, given the large 0.5% increase in consumer prices reported for January. One-off factors including shifting seasonal adjustment dynamics and the harsh winter weather likely amplified the usual post-holiday lull in spending. 

Still, the weakness was broad-based across retailers. As anticipated, purchases of motor vehicles were a drag on top-line retail sales. They fell by their most in seven months, 2.8%, likely reflecting some paybacks from a strong December and the impact of the unusually cold weather in January, which likely kept consumers away from auto dealerships. Consumers cut back on purchases of sporting goods (-4.6%), building materials (-1.3%), clothing (-1.2%) and personal care products (-0.3%) in January. They also spent less online as non-store sales plunged 1.9% following a modest 0.6% increase in December. 

While consumer spent more at gas stations (+0.9%), it entirely reflected higher prices at the pump, which were up 1.8%. Strong spending at restaurants and bars (+0.9%) was the only bright spot and suggests that services spending could have offset some weakness in goods consumption during the month. 

Control retail sales – a key gauge of broader consumer spending trends that strips out the volatile components – fell 0.8%, the first decline in five months and a notable reversal from the 0.8% increase in the prior month. The latest data points to softer spending momentum at the start of the year, though the upward revisions to the December figures imply an even sturdier carry-over from Q4 2024.

Looking ahead, the combination of moderating inflation, resilient labor market trends and strong momentum at the end of 2024 should still put a floor under consumption growth in Q1. However, we expect some moderation in spending trends in coming months as income growth decelerates, especially for lower- to median-income families that are grappling with higher debt burdens and reduced savings buffers.

Looking ahead, we see consumer spending growth of 2.6% in 2025, following a 2.8% advance in 2024. The average will mask a gradual moderation in spending trends with spending momentum likely to ease from 3.2% year over year (y/y) in Q4 2024 toward 2% y/y in Q4 2025.