US Retail Sales Disappoint in May Amid Broader Economic Concerns

Retail sales in the United States dropped more than expected in May, falling 0.9% after a downwardly revised 0.1% dip in April, according to the Commerce Department’s Census Bureau. This decline disappointed expectations for only a 0.5% drop. The pullback was primarily weighed down by reduced motor vehicle purchases as consumer urgency to beat potential tariff-related price hikes faded.

So-called core retail sales—which exclude automobiles, gasoline, building materials, and food services, and correspond most closely with the consumer spending component of GDP—contracted 0.3% in May, following a flat reading in April. Analysts had forecast a 0.2% growth in core sales.

Consumer spending, which accounts for more than two-thirds of US economic activity, slowed sharply in the first quarter and could remain moderate in the April–June quarter. Despite headwinds, spending has been somewhat supported by solid wage growth.

However, downside risks to consumer spending are rising. The labor market is slowing, student loan repayments have resumed for millions of Americans, and household wealth has been eroded by tariff-induced stock market volatility. Additionally, the uncertain economic environment could lead to more precautionary saving.

The Federal Reserve’s Federal Open Market Committee has begun a two-day policy meeting and is widely expected to keep its benchmark overnight interest rate unchanged in the 4.25%–4.50% range, while it monitors the economic impact of tariffs and escalating tensions in the Middle East.

The US central bank is currently forecasting GDP to rebound at a 3.8% annualized rate in the second quarter. This anticipated surge will largely reflect a reversal in imports, which have fallen sharply as earlier frontloading of goods fizzled. In contrast, the economy contracted at a 0.2% pace in the January–March quarter.

Sweeping US tariffs have raised concerns over global growth, putting pressure on oil prices. However, escalating conflict between Israel and Iran has provided upward support for energy markets. Unseasonably cooler weather is also expected to dampen sales.

Economists expect the biggest impact of tariff-induced price rises to emerge in July, though effects will likely persist throughout the remainder of the year.