U.S. consumer spending barely rose in January as households cut back on purchases of a range of goods, suggesting the economy started the first quarter on a softer note.
Sluggish spending came despite cheap gasoline and a buoyant labor market, leaving economists to speculate that consumers were using the extra income to pay down debt and boost savings.
"There is a risk of a temporary soft patch for the economy as it is somewhat surprising the consumer has stopped spending their savings from gasoline prices," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
The Commerce Department said on Thursday retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1 percent last month.
That followed a 0.3 percent drop in December and was below Wall Street's expectations for a 0.4 percent increase.
The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Overall retail sales slipped 0.8 percent in January, declining for a second straight month as falling gasoline prices undercut sales at service stations.
The soft core retail sales prompted Barclays to lower its first-quarter GDP growth estimate by three-tenths of a percentage point to a 2.2 percent annual rate. JPMorgan cut its estimate to a 2.5 percent rate from a 3 percent pace.
The economy grew at a 2.6 percent annual pace in the fourth quarter. However, inventory and trade data for December was below the government's assumptions in the GDP report, suggesting growth could be revised to as low as a 1.8 percent rate.
U.S. financial markets were little moved by Thursday's data, with attention focused on details of a ceasefire agreement between Russia and Ukraine and a surprise interest rate cut and bond purchasing program announced by Sweden's central bank.
WAITING FOR TAKE-OFF
Despite a 39.5 percent decline in gasoline prices since June, consumer spending has been soft in the past two months.
Still, cheaper gasoline prices and robust employment gains are expected to provide a powerful stimulus to consumer spending and keep the economy on an expansion path, despite sputtering growth in Asia and Europe.
"Should we be worried about the weakness of underlying sales over the past two months? Possibly," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
"But all the conditions are in place for a period of very strong consumption growth. We still expect to see that strength come through in the retail sales data soon."
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, expanded at its quickest pace since 2006 in the fourth quarter.
Softer consumer spending posed a risk to a much anticipated mid-year interest rate increase by the Federal Reserve.
"In practice, the Fed cares a lot about GDP growth. GDP has disappointed while the labor market hasn't," said Michael Feroli, an economist at JPMorgan in New York. "All else equal, the continued unexciting pace of GDP growth does present a modest challenge to our June Fed call."
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits rose 25,000 to a seasonally adjusted 304,000 last week.
The underlying trend, however, remained consistent with a strengthening jobs market.
Difficulties adjusting the claims data for seasonal variations have caused volatility in recent weeks.
The four-week moving average of claims, seen as a better measure of labor market trends as it irons out week-to-week volatility, fell 3,250 to 289,750 last week.
"Jobless claims still remain in a range that has historically been highly constructive for the jobs market," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
The economy has added more than a million jobs over the past three months, an achievement last seen in 1997. A key measure of labor market slack - the number of job seekers for every open position - hit its lowest level since 2007 in December.