Restaurant Sales Sink: Recession Warning Or Just Weather-Driven Dip?

U.S. retail sales edged up only slightly in February, falling well short of expectations and keeping alive concerns about consumer strength after January’s dire contraction.

Yet, a closer look at the latest data continues to reveal pockets of resilience leaving investors and economists debating whether consumer demand is cooling or simply shifting.

In data released Monday by the U.S. Census Bureau, the retail sales figure showed a 0.2% monthly growth in February, following a downwardly revised 1.2% drop in January. The headline figure missed economist estimates of 0.6%.

Far From Being An Outright Recession

“The unfavorable surprise on U.S. headline retail sales—monthly growth of 0.2% compared to the consensus forecast of 0.6%—was not reflected in the other numbers in this data release,” said Mohamed El-Erian, chief economic advisor at Allianz.

A particularly important measure, known as the retail sales “control group”—which excludes spending at auto dealers, building materials, gas stations, office supply stores, mobile home dealers, and tobacco retailers—jumped 1% in February. This fully offset January’s 1% decline and handily beat estimates of a modest 0.2% gain.

This control group is closely watched because it feeds directly into GDP calculations, making it a key indicator of underlying consumer demand.

Joseph Brusuelas, chief economist at RSM US LP, said the data remains consistent with a slowing but still solid pace of household spending.

“On a three-month average annualized pace, the control group advanced 2.6%,” Brusuelas said. “Yes, the economy is slowing, but not in line with anything near a recession yet.”

Restaurants And Bars See Sharp Drops

Not all areas of consumer spending fared well.

One of the most striking data points was the decline in restaurant and bar sales, which fell 1.54% in February—the largest drop since February 2023, as highlighted by Kevin Gordon, senior investment strategist at Charles Schwabb.

“Over the last three months, restaurant sales have collapsed 8.5% at an annual rate,” Reinassance Macro Research indicated.

This pullback suggests that discretionary spending may be softening as households become more selective about where to spend their money.

“Notable weakness in restaurants and bars—the largest decline in two years—with no growth over the last three months,” Gregory Daco, chief economist at Ernst & Young US, said.

“Spending growth at restaurant chains decelerated from -1.7% in January to -7.5% in February while spending at independent restaurants turned negative, failing from +2.6% in January to -2.7% in February,” Sara Senatore, analyst at Bank of America, wrote in a note Monday.

“We believe this sequential deceleration is largely a combination of negative weather trends that worsened from January and the impact of calendar shifts, including one less day (2024 had a leap day) and the Valentine’s Day shift from a Wednesday in 2024 to a Friday in 2025,” she added.

Market Reaction: Consumer Staples Rally, Discretionary Stocks Lag

Stocks tied to non-discretionary consumer spending saw a solid rebound Monday, as investors rotated into defensive plays.

The Consumer Staples Select Sector SPDR Fund XLP rose 0.9%, led by Brown-Forman Corp. BF, which surged 2.8% on the back of rising U.S.-Europe trade tensions over whiskey tariffs.

Other major gainers included Archer-Daniels-Midland Company ADM, The Estée Lauder Companies Inc. EL, and Constellation Brands Inc. STZ, all of which climbed about 2%.

Meanwhile, the SPDR S&P Retail ETF XRT gained 1.1%, with notable jumps from Guess Inc. GES, up 32%, EVgo Inc. EVGO, up 7%, and American Eagle Outfitters AEO, up 6.8%.

However, the consumer discretionary sector struggled to gain traction.

The Consumer Discretionary Select Sector SPDR Fund XLY inched up just 0.1%, weighed down by concerns over spending cutbacks. Still, a few travel and leisure names saw gains, with Airbnb Inc. ABNB, eBay Inc. EBAY, Carnival Corp. CCL, and Norwegian Cruise Line Holdings Ltd. NCLH each rising around 3%.

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Image created using artificial intelligence via Midjourney.