Consumer spending on cars and other expensive things decreased more than anticipated in March in the US, signaling that the economy was losing momentum at the end of the first quarter as a result of increasing interest rates.

Retail sales are anticipated to stay low given the weakening labor environment. Manufacturing output at factories is being hampered by waning consumer demand, according to other statistics released on Friday. While this is the Federal Reserve’s fastest cycle of tightening monetary policy since the 1980s, it is still expected to hike rates one more time in May before a pause is predicted in June.

“Households are clearly feeling the pinch from rising interest rates and the extended period of high inflation and are reducing expenses to compensate,” said Ben Ayers, a senior economist at Nationwide in Columbus, Ohio. “While job and income gains remain strong, the cracks in the consumer sector are widening and a negative shift in hiring activity could be the final blow to place the economy in a recession.”

According to the Commerce Department, retail sales decreased by 1.0% last month. Retail sales for February decreased by 0.2% rather than by 0.4% as had been initially reported, according to revised data. Reuters polled economists, who predicted a 0.4% decline in sales. In March, they saw a year-over-year growth of 2.9%.

The majority of retail sales are made up of items, which are frequently financed, and thus are not inflation-adjusted. A significant increase in January was followed by the second consecutive monthly drop.

It occurred at the same time that a temporary increase in Supplemental Nutrition Assistance Program (SNAP) benefits that had been allowed by the US Congress to protect low-income individuals and families from the effects of the COVID-19 pandemic’s problems expired.

Food stamps are the common name for SNAP. According to Morgan Stanley, the termination of the emergency program caused a non-annualized income hit of around $4 billion.

“The expiration of SNAP benefits is another catalyst that will lead consumers at the lower end of the income spectrum to become more cautious spenders and allocate a greater share of their wallet away from discretionary items,” said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York.

Nearly all areas of retail sales were declining. Auto dealers’ receipts fell 1.6%. While sales at electronics and appliance retailers dropped 2.1%, furniture store sales dipped 1.2%. Building supply and garden supply stores had a 2.1% decline in sales.

Retail sales at apparel stores fell 1.7%. Service station sales fell 5.5% as a result of lower gas prices. Sales decreased by 0.6% when petrol stations are excluded.

However, internet retail sales increased 1.9%, probably as price-conscious shoppers sought for offers and discounts. The amount spent on recreation and grooming grew slightly. The single services area in the retail sales report—food and beverage sales—saw a 0.1% increase. Going out to eat is a major sign of household finances, according to economists.

It was unclear whether the failure of two regional banks in March had an effect on retail sales, which led to a tightening of credit conditions. But sales in the next months were expected to suffer from restricted access to finance.

According to a separate poll released on Friday, consumer mood increased in April, but families with higher incomes were more negative.

The Fed’s year-long interest rate hike campaign, which is reducing inflation by cooling domestic demand, is mostly to blame for the decline in retail sales. Employment growth and activity in the services industry slowed down in March, according to reports last week.

A third data from the Labor Department indicates that import prices fell by 0.6% in March after falling by 0.2% in February, suggesting that inflation may continue to decline.

As a result, import prices fell 4.6% in the year ending in March, the biggest annual decline since May 2020.

Wall Street stocks were trading at a lower level. Against a basket of currencies, the dollar increased. Treasury prices dropped.

Since last March, the Fed has increased its policy rate by 475 basis points, moving it from a level near zero to the current range of 4.75%-5.00%. According to the FedWatch tool from CME Group, financial markets anticipate another 25 basis point hike at the Fed’s policy meeting on May 2-3.

Retail sales declined 0.3% last month when cars, gas, building supplies, and food services were excluded. In February, these so-called core retail sales rose by an unrevised 0.5%.

The portion of gross domestic product that represents consumer spending most closely resembles core retail sales. Despite the decline in March, consumer spending is still on course to increase in the first quarter because to the rises in January and February.

But going into the second quarter, consumer spending was on a slower growth path due to the weak core sales.

More than two thirds of American economic activity is comprised of consumer spending, which grew at the weakest rate in more than two and a half years in the fourth quarter. Estimates of economic growth during the first quarter are often higher than a 2% yearly pace. In the three months from October to December, the economy grew at a 2.6% rate.

In the Fed’s fourth report, manufacturing production was revealed to have decreased 0.5% in March after rising 0.6% in February.

Production of vehicles decreased 1.5%. Production in manufacturing declined 0.5% when vehicles were excluded.

For company investment, the weakening and banks’ tightening of lending conditions are not promising.

“This is a warning sign that the share of manufacturing industries contracting is on the rise, a bad omen for the economy,” said Ryan Sweet, chief economist at Oxford Economics.

The economy’s 11.3% manufacturing sector is also suffering from the change in consumer expenditure from products to services. As demand slows, businesses are keeping surplus inventory, which lessens their incentive to place additional orders with factories.

The unwillingness of enterprises to increase their inventory could potentially restrain GDP growth. A fifth survey revealed a small increase in corporate inventory in February.

“Because inventories are a stock, it’s the change that matters for GDP,” said Sweet. “So, even a slowdown from the recent rapid inventory build has the potential to weigh heavily on economic growth in the first half of this year.”

(Adapted from Reuters.com)

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