By Lucia Mutikani

WASHINGTON (Reuters) -U.S. retail sales rebounded marginally in February as consumers pulled back on discretionary spending, reinforcing the growing uncertainty over the economy against the backdrop of tariffs and mass firings of federal government workers.

Nonetheless, the report from the Commerce Department on Monday suggested that the economy continued to grow in the first quarter, though at a moderate pace. It sketched a picture of a cautious consumer, with sales at restaurants and bars declining by the most in 13 months amid deteriorating sentiment.

"This report should alleviate concerns that the economy already is shrinking," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "But the risk of much weaker growth, as consumers seek to rebuild a savings buffer in response to concerns about job security, now looks elevated."

Retail sales rose 0.2% last month after a downwardly revised 1.2% decline in January, which was the biggest drop since November 2022, the Commerce Department's Census Bureau said.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.6% after a previously reported 0.9% drop in January.

That decline followed hefty gains in the fourth quarter and winter storms in many parts of the country in January as well as wildfires in California.

Sales increased 3.1% year-on-year in February. Monthly sales were lifted by a 2.4% surge in receipts from online stores. Sales at health and personal care stores jumped 1.7%. Sales at building material and garden equipment suppliers gained 0.2%.

But receipts at auto dealerships fell 0.4% after dropping 3.7% in January. Furniture store sales were unchanged while receipts at clothing stores fell 0.6% and those at electronic retailers dropped 0.3%.

Receipts at food services and drinking places, the only services component in the report, declined 1.5%. That was the largest drop since January 2024 and followed an unchanged reading in January.

Economists view dining out as a key indicator of household finances. Some believed cold weather could have kept people at home. Lower gasoline prices helped to lower the value of sales at service stations by 1.0%. Sporting goods, hobby, musical instrument and bookstore sales fell 0.4%.

Stocks on Wall Street were higher. The dollar eased against a basket of currencies. Longer-dated U.S. Treasury yields slipped while shorter-dated ones rose.

With consumer sentiment sinking to a near 2-1/2-year low in March, sales could struggle in the months ahead.

President Donald Trump's raft of tariffs, which have unleashed a trade war, has ignited worries about inflation as well as job and income losses, developments that could undercut consumer spending. Mass layoffs of public workers as part of an unprecedented campaign by the Trump administration to shrink the federal government are also seen hurting spending.

SOFTENING DISCRETIONARY SPENDING

Retailers, including Kohl's, Macy's, Walmart and Target have tempered sales expectations amid mounting inflation and recession fears related to the tariffs.

Bank of America card data showed early signs of softening discretionary spending such as at restaurants in February in the Washington D.C. metropolitan area, which includes parts of Maryland and Virginia. A stock market selloff could curb spending, predominantly driven by high-income households, while rising food prices could squeeze low-income households.

Treasury Secretary Scott Bessent said early this month the economy might slow as it transitions from public spending towards more private spending, calling it a "detox period." On Sunday, Bessent said there were "no guarantees" there will not be a recession in the United States.

Federal Reserve officials meeting on Tuesday and Wednesday are expected to leave the U.S. central bank's benchmark overnight interest rate in the 4.25%-4.50% range, having reduced it by 100 basis points since September, and continue to assess the economic impact of the Trump administration's policies.

Financial markets expect the Fed to resume cutting borrowing costs in June after it paused its easing cycle in January amid a darkening economic outlook.

"The Fed is in a bind as it will have to balance the risks of a slowing economy and consumer against the possibility that sizable tariffs could stoke another round of inflation in the months ahead," said Scott Anderson, chief U.S. economist at BMO Capital Markets. "Today's retail sales data signals growing consumer distress, but not clear-cut recessionary behavior."

Retail sales excluding automobiles, gasoline, building materials and food services increased 1.0% in February after a downwardly revised 1.0% decline in January.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have dropped 0.8% in January.

Economists expect consumer spending growth to slow to as low as a 1.2% annualized rate this quarter from the October-December quarter's robust 4.2% pace.

The Atlanta Fed is currently forecasting GDP contracting at a 2.1% pace this quarter. But most economists' estimates range from as tepid as a 0.5% growth rate to as high as a 1.3% pace. The economy grew at a 2.3% pace in the fourth quarter.

Rising inventories as consumer spending slows could, however, add to GDP growth. A separate report from the Census Bureau showed business inventories rebounded in January.

"Cracks are forming in the economy's foundation," said Lydia Boussour, senior economist at EY-Parthenon.