January Retail Sales Slide: Consumers Tighten Their Belts

The U.S. retail sector experienced a significant downturn in January, with sales dropping by 0.9% compared to the previous month. This decline, which was more pronounced than expected, reflects a combination of factors that have led consumers to tighten their spending. The holiday hangover, seasonal noise, wildfires, and severe cold weather all contributed to the downside surprise in retail sales (AP, 2025).

Despite the monthly decline, the underlying strength of the economy remains intact. Retail sales rose by 4.8% year over year, the second-highest level in nearly a year, since February 2024 (RSM, 2025). This suggests that the decline in January was more of a temporary setback rather than a sign of a weakening economy.

However, the decline in specific categories, such as autos and nonstore sales, contributed to the overall decrease in retail sales. Autos, which account for the largest portion of total sales on a dollar basis, fell by 2.8% in January. This decline reaffirmed the call that the increase in sales in the prior months was more of a shopping hangover rather than weaknesses in spending (RSM, 2025). Nonstore sales, made up of mostly online sales, also posted a sharp drop of 1.9% in January, which could be attributed to the holiday hangover, as consumers pulled back on their spending after the holiday season.

Food sales were down by 0.1% at stores but up by 0.9% at restaurants and drinking places. This suggests that consumers were still dining out, but they were cutting back on their grocery spending. Gasoline sales were up by 0.9%, driven partly by higher prices at the pumps, which may have discouraged some consumers from filling up their tanks.

The decline in retail sales in January was also influenced by the holiday hangover, as consumers pulled back on their spending after splurging during the holiday season. This is a common phenomenon that occurs every year, but it has been magnified over the past three years due to the residual effects of the pandemic, early shopping, and consumers pulling forward their purchases in anticipation of potential tariffs (RSM, 2025).

Consumer sentiment and confidence have been volatile in recent months, with the LSEG/Ipsos’ Primary Consumer Sentiment Index showing alternating gains and losses since November 2024. In January 2025, the index fell by 3.2% but rebounded by 0.9% in February (Johnny Sawyer, Ipsos). This volatility can be attributed to various factors, including the ongoing political uncertainty in Washington and the new administration's economic vision taking shape.

Consumer confidence plays a significant role in the January retail sales decline. Despite the rebound in February, the index remains lower than its levels in 2024 and 2023, indicating that consumers are still cautious about the economy. This cautiousness, combined with the lingering effects of inflation and the potential impact of tariffs on spending habits, has likely contributed to the decline in retail sales.

Moreover, consumers have been shifting some spending from goods into services, which could also explain the decrease in retail sales. This trend, along with the interplay between goods and services, is expected to cause volatility in discretionary categories throughout the year (David Silverman, Fitch Ratings).

In summary, the decline in retail sales in January 2025 was primarily driven by the holiday hangover, seasonal noise, wildfires, and severe cold weather. The underlying strength of the economy remains intact, as evidenced by the 4.8% year-over-year increase in retail sales. However, the decline in specific categories, such as autos and nonstore sales, contributed to the overall decrease in retail sales. The recent trends in consumer sentiment and confidence, along with the shift in spending habits and the potential impact of tariffs, have also contributed to the decline in retail sales in January 2025.