Americans reduced their retail expenditures in July, reflecting a decline in their confidence regarding the economy. That represents a potentially concerning mix for an economy reliant on consumer spending. Retail sales decreased by 0.6% in July compared to the previous month, according to the Commerce Department’s report released on Friday. This decline follows a 0.2% drop in June and represents the most significant decrease since May 2025. Those figures are adjusted for seasonal fluctuations but not for inflation. A separate report from the University of Michigan indicated that consumer sentiment experienced a decline of approximately 8% early this month, resulting in a preliminary reading of 51, thereby concluding a two-month period of increasing sentiment. Both reports came in worse than anticipated in polls by data firm FactSet, indicating that the lifeblood of the US economy — consumer spending — is facing increasing pressure. Individuals’ expenditures represent approximately two-thirds of economic expansion. “American consumers are showing signs of fatigue,” Heather Long said in commentary issued Friday. For years, the US consumer has demonstrated resilience amid a succession of economic challenges, including the Federal Reserve’s assertive rate-hiking strategy aimed at curbing inflation from 2022 to 2023, as well as the prevailing uncertainty during President Donald Trump’s second term. Spending has remained resilient, largely attributed to consistently low unemployment rates and a thriving stock market that has enhanced household wealth for a significant portion of the population.
However, persistent expenditure did not imply that Americans were immune to the effects of rising prices. Joanne Hsu stated in a release on Friday that there exists a widespread “belief that high prices will continue to be burdensome.” Sales at petrol stations decreased by 0.9% in July, as reported in the retail data, aligning with the decline in energy prices during that month. That negatively impacted the overall reading for July; however, when excluding those sales, retail spending still experienced a decline of 0.6%. Additionally, a gauge of retail spending that excludes volatile categories and serves as an indicator of underlying demand also fell short of expectations, decreasing by 0.44% in July, in contrast to the 0.4% increase anticipated by economists. In July, online sales experienced a decline of 2.2%, marking the most significant drop across all categories. This was closely followed by a 2% reduction in sales at car dealerships. Meanwhile, expenditures at dining establishments and drinking venues increased by 0.5% in the previous month. “Some of the pullback in July is due to Amazon Prime Days, Walmart+ and Target Circle deals happening in June,” Long said. “But even with lower spending on gas in July, consumers weren’t eager to spend elsewhere.” Retail sales increased by 5% in July compared to the same month last year, indicating a broader expansion in the US economy, including price levels, although this figure represents a decline from the 3.5-year peak observed in May.
In recent years, the majority of America’s shopping activity has been propelled by affluent consumers, who are presumably bolstered by the appreciation of their stock market investments. Hsu said that weaker sentiment early this month was “pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree.” They were joined by Republicans, who showed the strongest monthly decline in sentiment across the political spectrum, according to the Michigan survey. Retail spending has exhibited a downward trend since the spring, as the initial uplift from larger tax returns diminished and escalating energy prices have adversely impacted consumers’ disposable income. However, expenditures may not experience a direct decrease, provided that the labour market remains stable. In July, employers reduced their workforce by 23,000 positions, while the labour force participation rate declined to its lowest level since 1976, excluding the pandemic period, as reported by government data. Unemployment, however, persists at a historically low level of 4.1%, with a portion of the decrease in labour force participation attributable to the ageing demographic.
If the labour market begins to show signs of weakness and consumers reduce their expenditures, this would likely diminish the probability of the Federal Reserve increasing interest rates for the first time since July 2023. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, stated in an analyst note Friday, “markets may embrace the data in the near term because it strengthens the case for avoiding rate hikes.” The Fed is tasked with addressing inflation, which has become a growing problem as the conflict with Iran has elevated energy prices. However, the central bank also bears the responsibility of ensuring maximum employment. In 2024, the Fed took decisive action to preempt a deterioration in the labour market, implementing a significant half-point rate cut. Officials have recently started to consider increasing rates to address inflation; however, this assessment may shift if economic data indicates that the labour market could pose a more significant challenge.
