The US economy faced a dual setback in January, with both retail sales and manufacturing output recording declines.
Retail sales posted their largest drop in nearly two years, while manufacturing production unexpectedly contracted, largely due to a sharp decline in motor vehicle output.
Retail sales fall amid freezing temperatures and tariff concerns
According to the Commerce Department, US retail sales fell 0.9% in January—the biggest decline since March 2023—following a revised 0.7% increase in December.
The drop was broad-based, with sales at auto dealerships plunging 2.8%, clothing stores down 1.2%, and online sales falling 1.9%.
Cold weather and snowstorms across the country played a role in discouraging consumer spending.
Economists also point to rising inflation expectations and uncertainty over new trade tariffs as factors affecting consumer confidence.
A University of Michigan survey last week showed that households believe it may now be too late to avoid the negative impact of new import levies.
A 10% tariff on Chinese goods was implemented this month, while a planned 25% tariff on Mexican and Canadian imports has been delayed until March.
Manufacturing contracts as auto production slumps
US manufacturing production fell 0.1% in January after a downwardly revised 0.5% increase in December, according to Federal Reserve data.
Economists had expected a slight gain.
The decline was largely driven by a steep 5.2% drop in motor vehicle and parts production.
The broader manufacturing sector, which makes up about 10.3% of the economy, had shown signs of recovery in recent months following the Federal Reserve’s interest rate cuts.
However, protectionist trade policies under President Donald Trump, including new tariffs on steel, aluminum, and Chinese imports, have introduced fresh challenges.
Economists warn that disruptions to global supply chains could lead to higher raw material costs, further straining manufacturers.
Economic outlook remains uncertain
Despite weaknesses in retail and manufacturing, other areas of the economy showed resilience.
Utilities output surged 7.2% as demand for heating spiked due to extreme weather conditions. Industrial production as a whole rose 0.5% in January, following a 1.0% increase in December.
Meanwhile, retail spending at restaurants and bars—a key indicator of household financial health—climbed 0.9%, offering a positive signal for consumer demand.
However, the overall decline in retail and factory activity raises concerns about economic growth in the first quarter.
With trade tensions persisting and interest rate policy uncertain, businesses and consumers alike are navigating an increasingly complex economic landscape.
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