Retail sales surge 3% at start of 2023 in clear sign the economy is still growing

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The numbers: Sales at U.S. retailers jumped 3% in January — the biggest increase in almost two years — as Americans flocked to the stores at the start of the new year.

Retail sales are a big part of consumer spending and offer clues about the strength of the economy. The sterling January report could help generate a better-than-expected increase in first-quarter gross domestic product.

Sales were forecast to rise 1.9%, based on a Wall Street Journal poll of economists.

Receipts increased a still-strong 2.6% if auto dealers and gas stations are excluded. Car and gasoline purchases can exaggerate the ups and downs in overall retail spending.

Big picture: Retail sales slowed sharply in the second half of 2022 due to high inflation and a softening economy. Similarly large gains like the one last month are unlikely to be regular staple this year, economists caution.

Why so? The Federal Reserve is still raising interest rates to try to tame inflation, a strategy that works by weakening the economy. Higher borrowings cost depress consumer spending and business investment.

Yet with unemployment at a 54-year low and many companies still hiring, consumers could keep spending just enough to keep the economy out of recession — what economists call a “soft landing.”

The January increase in sales lends support to that idea. Household purchases are the main engine of U.S. growth.

Market reaction: The Dow Jones Industrial Average and S&P 500 were set to open lower in Wednesday trades. The retail report was viewed as strong enough to keep the pressure on the Fed to raise rates. Higher rates tend to hurt stocks.

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