The larger-than-expected drop in retail sales reported by the Commerce Department on Thursday also reflected a sharp fall in receipts at services stations because of lower gasoline prices. Consumer spending remains supported by a fairly healthy labor market, which is keeping wage growth elevated.

"It was a weak start to the year for consumers shopping at the malls, but the harsh winter weather effect looms large," said Christopher Rupkey, chief economist at FWDBONDS in New York.

Retail sales dropped 0.8% last month, the biggest drop since February 2023, the Commerce Department's Census Bureau said. Data for December was revised lower to show sales rising 0.4% instead of 0.6% as previously reported.

Economists polled by Reuters had forecast retail sales dipping 0.1%. Retail sales are mostly goods and are not adjusted for inflation. December sales were partially flattered by generous seasonal factors, the model the government uses to strip out seasonal fluctuations from the data.

Unadjusted retail sales typically fall in January. The seasonal factors were less supportive for this January compared to previous years, resulting in the large drop in adjusted sales last month. Economists had cautioned before the release of the data not to read too much into any sharp drop.

"It is hard to know exactly what the 'right' seasonal factor is for a given month but the seasonal factors associated with December 2023 and January 2024 look unusual relative to the ones associated with these months in earlier years," said Daniel Silver, an economist at JP Morgan in New York. "The individual seasonally adjusted changes for these months likely should be discounted when trying to determine the trend for the data."

BROAD WEAKNESS

Receipts at motor vehicles and parts dealers plunged 1.7%.

Sales at building material and garden equipment outlets tumbled 4.1%, likely because of winter storms that blanketed much of the country in mid-month.

Gasoline station receipts dropped 1.7% as gasoline prices declined. Online sales dropped 0.8% after surging 1.4% in December. Sales at electronics and appliance outlets fell 0.4%, while those at clothing stores declined 0.2%.

But sales at food services and drinking places, the only services component in the report, increased 0.7%. Economists view dining out as a key indicator of household finances. Furniture stores receipts surged 1.5%.

Though momentum is likely to slow this year, consumer spending remains healthy, thanks to a resilient labor market and rising household purchasing power as inflation subsides.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 8,000 to a seasonally adjusted 212,000 for the week ended Feb. 10.

Claims are bouncing around low levels despite a recent rush of high-profile layoffs, mostly in the technology and media sectors. Economists had forecast 220,000 claims for the latest week. Companies are mostly reluctant to layoff workers after struggling to fill jobs during and after the COVID-19 pandemic.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 30,000 to 1.895 million during the week ending Feb. 3, the claims report showed.

Retail sales excluding automobiles, gasoline, building materials and food services decreased 0.4% in January. The so-called core retail sales measure corresponds most closely with the consumer spending component of GDP.

Core sales for December were revised down to show them rising 0.6% instead of the previously reported 0.8%. Economists are forecasting strong services spending growth in January, which should keep overall consumer spending afloat.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a brisk clip in the fourth quarter, contributing to the economy's 3.3% annualized growth pace. The economy expanded at a 4.9% rate in the July-September quarter.