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Consumers cut back on motor vehicle and other big-ticket purchases, leading to an unexpected decline in U.S. retail sales in March. The drop in retail sales signals that the economy lost momentum at the end of the first quarter owing to higher interest rates. However, the Fed will likely further hike rates once more when it meets next.

The declining demand for goods is weakening factory production, with recent data showing manufacturing production also lowered during the last month.

Retail sales were down 1.0% during March. As previously reported, data for February was revised with sales lowering by 0.2% instead of 0.4%. This is a second straight monthly decrease, followed by a sharp surge in January.

The decline was almost universal. Receipts at auto dealers dropped 1.6% after lowering 1.3% in February. Furniture store sales also fell 1.2%, while receipts at electronics and appliance stores were further down by 2.1%.

Sales at building material and garden equipment supply dealers took a 2.1% hit. Clothing outlets sales dropped 1.7%. Lower gasoline prices depressed sales at service stations, with a 5.5% plunge in March.

Some sectors also showed minor gains. Online retail sales jumped by 1.9%, while sales of sporting goods, hobbies, musical instruments, and bookstores gained 0.2%. Sales at food services and drinking establishments, the lone services category in the retail sales report, edged up 0.1%.

Manufacturing also takes a hit

A different report from the Fed exhibited manufacturing production dropped by 0.5% in March after increasing 0.6% in the previous month. Manufacturing accounts for 11.3% of the total U.S. economy. The output increased by 0.3% annualized rate in the first quarter after declining by 3.1% in the fourth quarter of 2022.

The sector took a hit due to the shift in spending from goods to services. Businesses are carrying excess stocks as demand slows, removing any incentives for them to place more orders with factories.

Last month, the manufacturing of durable goods fell 0.9%, with most producers of long-lasting goods posting declines. The output of nondurable goods also edged down slightly by 0.1%.

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