U.S. retail sales are expected to have taken a short-term hit last month due to a delay in tax refunds
Americans have been spending more in recent months. February may not look as rosy, but the effect is probably temporary
The Commerce Department is due to report retail sales data on Wednesday, hours before the Federal Reserve announces its interest rate decision. Economists expect growth slowed but stayed positive last month. The culprit won’t be a structural shift in spending, but rather a delay in tax refunds that had the biggest impact on low-income households. And while this could hurt February’s figures, it could also boost spending in future months.
Economists polled by The Wall Street Journal estimate that retail sales edged 0.1% higher in February. That would be the sixth consecutive month of positive growth on a monthly basis. Yet it would also would represent a slowdown from January, when retail sales rose 0.4 % from a month earlier and gained 5.6 % on a year-over-year basis, the best in nearly five years.
Higher wages and improving levels of consumer confidence have helped give spending a lift in recent months. Last week’s jobs report showed average hourly earnings in the private sector rose 2.8% in February from a year earlier, much better than the typical 2% growth rate for much of the economic expansion. Several measures of consumer confidence have risen to multiyear highs following the presidential election.
But economists say spending in February might have taken a short-term hit due to a change in the timing of when tax refunds were given to consumers. The IRS warned earlier this year that millions of Americans would get their tax refunds later than usual due to a new law passed by Congress designed to help reduce tax fraud.
Tax refunds are usually a big driver of spending in the period after the holidays. Through Feb. 22, Americans had received $36 billion in tax refunds, roughly one-third of what they had received through the same period a year ago. That gap narrowed by the end of the month. Retailers and restaurant operators already have warned that this delay could hurt results.
“The huge shortfall in refunds relative to last year’s pace has now almost disappeared, consistent with retail sales rebounding in March,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics, “but it raises the potential for the February retail sales report to look quite week.”
Fast-food chain Jack in the Box Inc. warned earlier this month that the delay of tax refunds would hurt results. Wal-Mart Stores Inc. said last month that sales were slower than usual at the start of the year, but that it expects sales to pick up. Foot Locker Inc. also noted the issue was hurting spending patterns.
“It is our belief that our customers’ fundamental appetite for the product has not changed,” Lauren Peters, Foot Locker’s chief financial officer, said on an earnings call late last month. “However, the timing of their cash flows and their ability to buy the product has been impacted.”
The upshot: Uncle Sam’s gift to the American consumer may have been a little late this year, but he is good for the money.