February Retail Sales Miss Expectations, Raising Concerns About Slowing U.S. Economy Ahead of Fed Meeting

The February 2025 retail sales report came in below expectations, adding to concerns about a potential slowdown in the U.S. economy ahead of the Federal Reserve’s key policy meeting on Wednesday. Retail sales rose 0.2% month-over-month, missing the consensus estimate of 0.6%, and while year-over-year growth stood at 3.1%, the sluggish monthly pace raises fresh questions about consumer resilience.

Retail Sales Miss Expectations, Fueling Economic Concerns

The report marks the latest in a string of weaker-than-expected economic data, reinforcing the possibility that the Fed may adopt a more cautious tone in its upcoming meeting. While the latest numbers are unlikely to push the Fed toward immediate rate cuts, they align with a broader trend of softer economic indicators, including the New York Fed’s Empire State Manufacturing Index, which plunged to -20.0 in March—far below the expected -1.9.

Breaking Down the Report: Strengths and Weaknesses

Despite the disappointing headline figure, certain retail segments posted solid gains. Health and personal care stores led the way, climbing 1.7% month-over-month and 6.7% year-over-year, reflecting continued consumer demand for essentials. Food and beverage stores saw 0.4% month-over-month growth, aligning with broader trends in steady grocery demand. Furniture and home furnishing stores were flat on the month but still posted an impressive 5.5% year-over-year gain, suggesting some resilience in discretionary spending on home-related goods.

However, weakness was apparent across several key sectors. Auto and motor vehicle sales declined 0.4% month-over-month, following a 3.7% drop in January, indicating ongoing struggles in the automotive sector. Gasoline station sales fell 1.0% month-over-month, reversing January’s 1.3% increase, likely due to declining fuel prices. Clothing and clothing accessories stores declined 0.6% month-over-month, suggesting cautious discretionary spending. Department stores saw a sharper 1.3% monthly drop, though they remain up 4.3% year-over-year.

One of the most significant declines came in food services and drinking places, which fell 1.5% month-over-month despite an annual gain of 6.5% year-over-year. This could indicate that consumers are cutting back on dining out, a potential early sign of tightening household budgets.

Core Retail Sales Provide Some Silver Lining

While the headline number disappointed, core retail sales—excluding autos, gasoline, building materials, and food services—rose 1.0% month-over-month, well above expectations of 0.3%. This metric, often viewed as a key indicator of underlying consumer strength, suggests that while spending may be slowing in some discretionary areas, core retail demand remains relatively steady.

Retail sales excluding gasoline rose 0.3% month-over-month, reversing January’s -1.4% decline, while retail sales excluding autos and gasoline rose 0.5% month-over-month, slightly beating estimates. These figures indicate that while consumer spending growth has moderated, it has not collapsed.

Implications for the Federal Reserve and Markets

The softer retail sales print, combined with recent weakness in manufacturing and business sentiment, increases the likelihood that the Fed will adopt a slightly more dovish tone in its upcoming meeting. While policymakers are not expected to cut rates immediately, the trend of softening economic data could prompt revisions to the Fed’s economic projections, particularly in terms of growth and inflation expectations.

Markets have already adjusted their expectations, with investors now pricing in 65 basis points of rate cuts for 2025, down from 80 basis points earlier in the year. With retail sales missing estimates and the Empire State Manufacturing Index showing significant weakness, the case for monetary easing later in the year is strengthening.

Looking Ahead

The retail sector will continue to be a focal point for economic observers, as consumer spending accounts for nearly 70% of U.S. GDP. If the trend of weaker-than-expected spending continues, it could lead to downward revisions in growth forecasts for 2025.

For now, markets will await further clarity from the Fed, as well as additional economic data, including upcoming reports on consumer confidence and inflation. The February retail sales report serves as another signal that while the economy is not yet in a downturn, the momentum is slowing—a factor that will weigh heavily on the Fed’s decision-making in the months ahead.