Consumers Spent Heavily In March, Fueling An Already Hot Economy

March was a month of full shopping carts at shops and online stores, as consumers spent enough money to cause another surge in retail sales. 

Sales of food and retail goods rose 0.7% in March from February, the Census Bureau said Monday. That was more than double the 0.3% increase forecasters had expected according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. On top of that, February’s monthly sales increase was upwardly revised to a 0.9% gain from 0.6%.

The report was the latest in a string of data showing U.S. consumers continue to spend freely despite high prices and high borrowing costs putting pressure on household budgets. Surprisingly resilient consumer spending has kept the economy growing in recent months, fending off a long-anticipated recession, as a good job market and heavy consumer spending continue to boost one another.

“This report should dispel any thoughts that consumer spending has downshifted,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a commentary. “Given the various stimulus programs have stopped and money from them has been spent, consumer spending now rests firmly on incomes from paychecks, which continue to expand along with the labor market. This means a solid expansion should continue.”

That expansion faces some powerful headwinds, however. The Federal Reserve’s anti-inflation interest rate hikes have put upward pressure on borrowing costs throughout the economy, making credit cards and other consumer loans costlier and harder to get, all in an effort to discourage spending and quell inflation. Credit cards, for example, are charging their highest interest rates since at least the 1990s.

The details of the spending report showed those high rates are taking a toll although they haven’t managed to slow down overall spending levels. High interest rates for car loans have pushed monthly payments over $1,000 for many purchases. In March’s sales report, motor vehicle sales fell 0.9% over the month. Furniture sales also fell, dropping 0.3%, a sign that high mortgage rates, which have slowed down homebuying to a crawl, are having a ripple effect on other industries. 

“The home furnishings sector is a notable exception in a generally positive report,” Claire Tassin, retail and e-commerce analyst for polling firm Morning Consult wrote in a commentary. “The impact of interest rates on home buyer activity is an ongoing challenge for retailers in that category.”

Cutbacks in big-ticket items were more than canceled out by surging spending in other categories. Sales at online stores rose 2.7%, general retail sales were up 1.1%, and sales at miscellaneous stores were up 2.1%. Sales at gas stations rose 2.1% amid rising prices. 

All that was good news for retailers, but didn’t help the prospects for borrowers waiting for lower interest rates. High retail spending means upward pressure on inflation, which is likely to discourage officials at the Fed from lowering rates anytime soon. Consumer prices rose 3.5% over the year in March, according to the Consumer Price Index, well over the Fed’s goal of a 2% annual rate.  

“The lack of moderation in consumer spending and inflation will undermine Fed officials’ confidence that inflation is on a sustainable course back to 2% and likely delays rate cuts to September at the earliest and could push off rate reductions to next year,” Kathy Bostjancic, chief economist at Nationwide, wrote in a commentary.