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May Retail Sales Unexpectedly Slump as Consumers Pull Back

Consumer spending, the engine of the U.S. economy, showed fresh signs of strain in May as retail sales fell 0.9%, according to data released Tuesday by the Commerce Department. The drop was significantly steeper than the 0.6% decline forecasted by Dow Jones economists and follows a modest 0.1% dip in April. These figures are seasonally adjusted but not adjusted for inflation, underscoring growing consumer caution amid economic uncertainty.

While retail sales remain 3.3% higher than a year ago, May’s numbers reflect the most significant monthly drop in nearly a year and raise concerns that consumer spending may be losing steam after a period of resilience.

Breakdown: Which Sectors Felt the Pain?

The overall decline masked significant divergences across spending categories:

• Auto sales saw one of the sharpest declines, falling 3.5% as car buyers retreated after an earlier surge in March driven by fears of rising tariffs.
• Building materials and garden supplies sales dropped 2.7%, reflecting a slowdown in home improvement activity.
• Gasoline station sales fell 2%, primarily due to falling energy prices rather than reduced demand.
• Bars and restaurants also experienced a 0.9% decline, suggesting consumers are cutting back on discretionary spending.

However, not all sectors fared poorly:

• Miscellaneous retailers enjoyed a robust 2.9% increase in sales.
• Online retail sales continued to grow, rising 0.9%, highlighting the ongoing shift toward e-commerce.
• Furniture store sales climbed 1.2%, indicating some areas of durable goods spending remain healthy.

Control Group Points to Modest Underlying Strength

When stripping out volatile components like autos, building materials, gas stations, and food services—a measure known as the "control group" that feeds directly into GDP calculations—retail sales actually rose 0.4% in May. This suggests that while headline numbers show weakness, core consumer spending may not be deteriorating as sharply.

Economic Context: Rising Consumer Sentiment vs. Caution in Spending

Interestingly, May’s pullback occurred despite an uptick in consumer confidence. University of Michigan’s Consumer Sentiment Index showed an increase in May, though levels remain below their highs from previous years.

Economists attribute the mixed signals to growing uncertainty about the broader economy. Concerns over trade tensions, tariff threats, and geopolitical risks have weighed on both consumer and business confidence throughout 2025.

“Americans rushed to purchase cars in March to get ahead of potential tariff hikes, but they stayed away from showrooms in May,” said Heather Long, Chief Economist at Navy Federal Credit Union. “Families are increasingly price-sensitive, holding out for discounts and becoming more selective about where they spend.”

Trade Tensions Cast Long Shadow Over Spending Patterns

Much of the spending volatility traces back to the ongoing trade conflict initiated by President Trump’s tariffs. The April “liberation day” tariff announcement sparked consumer anxiety and temporarily boosted March sales as buyers sought to lock in lower prices.

While a 90-day negotiating window has eased some of the most aggressive rhetoric, uncertainty remains high. Businesses are cautious about inventory and pricing decisions, and consumers remain wary of potential cost increases that could emerge later this year.

GDP Outlook: Growth Still Expected to Rebound in Q2

Despite the retail sales weakness, broader economic growth expectations remain relatively upbeat. The Atlanta Federal Reserve’s GDPNow model projects second-quarter GDP growth at 3.8% annualized, up sharply from the 0.2% contraction reported in Q1.

If realized, this would mark a significant rebound and suggest that other sectors — such as business investment, services, and government spending — are offsetting weaker consumer demand in some areas.

Inflation Data Mixed as Import Prices Hold Steady

In a separate report, the Bureau of Labor Statistics noted that import prices were flat in May, slightly better than the anticipated 0.1% decline, while export prices fell 0.9%. The mixed inflation readings provide additional nuance to the Federal Reserve’s ongoing battle to balance interest rates while sustaining growth.

Market Reaction: Cautious Investors Await Clearer Signals

Following the retail sales release, U.S. stock futures remained negative while Treasury yields edged lower, reflecting investor uncertainty about the near-term trajectory of consumer spending and broader economic health.

Many analysts suggest that while consumer spending remains robust relative to historic norms, cracks are emerging as Americans contend with higher living costs, volatile energy prices, and policy uncertainty. How consumers respond in the second half of 2025 will be critical to determining whether the economy continues to expand or begins to cool more sharply.