U.S. Recovery in Doubt as Retail Sales Fall, Unemployment Rises

Two government reports released on Thursday indicate the U.S. recovery might not be as strong as previously believed.

Retail sales fell 0.8% on a month-to-month basis in January, the United States Department of Commerce reported. On a year-over-year basis, January retail sales rose 3.3% compared to the same period in 2014, a disappointing increase. Economists expected much stronger growth in retail sales, as low activity a year ago provided an easy basis for growth in 2015.

Two government reports released on Thursday indicate the U.S. recovery might not be as strong as previously believed.

Retail sales fell 0.8% on a month-to-month basis in January, the United States Department of Commerce reported. On a year-over-year basis, January retail sales rose 3.3% compared to the same period in 2014, a disappointing increase. Economists expected much stronger growth in retail sales, as low activity a year ago provided an easy basis for growth in 2015.

In dollars, retail sales rose to $439.8 billion in January, diminished by a decline in gasoline prices that offset growth in retail sales and food services, which rose 6.9% year-over-year when excluding gasoline.

According to the Census Bureau, retail trade fell 1% on a month-over-month basis, but rose 2.4% year-over-year. This figure refers to the sale of general merchandise purchased in “small quantities” by the public. Economists look at retail trade data as a leading indicator of aggregate demand, as growth here indicates a more confident consumer and a rise in discretionary spending.

Despite earlier confidence, the data indicates that consumers are not responding to falling gasoline prices by spending more aggressively elsewhere in the economy. Expectations of a stimulative effect from falling oil prices have pushed stock prices in the United States higher, while concerns about deflation have ebbed in the minds of many analysts.

Unemployment Claims Rise

While less Americans are making purchases in the retail market, unemployment claims surprised analysts by rising to 304,000 in weekly initial claims, according to the Department of Labor. Data released Thursday show the four-week moving average fell to 289,750. Economists predicted a fall of weekly claims to 285,000.

Economists expect a steady fall of unemployment claims in 2015 as a continuing economic improvement combined with robust retail sector growth creates greater demand for workers. However, more economists are now blaming cold weather in the north, which is restricting economic activity as consumers opt to stay at home to avoid the cold.

The unexpected rise in unemployment and fall in retail activity oddly boosted U.S. equities as speculation on further intervention by the Federal Reserve increased.  Repeatedly, Fed Chair Janet Yellen has publicly stated that the central bank remains on track to raise interest rates in 2015. Some expect rates to rise as early as June.

Others have argued that a rate hike could spark a recession and believe the Fed is more likely to wait until late 2015 or 2016 before raising their target for the Federal Funds rate.