US retail sales decline in May; is an economic slowdown in sight?

US retail sales fell more than expected in May, signalling potential cracks in consumer spending as Americans pull back on big-ticket items. The Commerce Department reported a 0.9 per cent decline in retail sales, following a downwardly revised 0.1 per cent drop in April.

Economists had forecast a smaller 0.7 per cent decrease, with estimates ranging from a 1.7 per cent drop to a modest increase.

The drop was primarily driven by a slowdown in vehicle purchases, as the rush to buy cars and trucks ahead of anticipated tariff-induced price hikes faded.

The effects of President Donald Trump’s trade policies, including a 25 per cent duty on imported vehicles that took effect in April, are continuing to weigh on consumer decisions.

Impact of tariffs and cooling consumer demand

The sluggish retail performance in May reflects broader concerns surrounding tariffs and the economic uncertainty they bring. US consumers had frontloaded big-ticket purchases earlier in the year as they anticipated rising prices due to tariffs. However, as the urgency around these price hikes diminished, consumer spending began to cool.

“Tariff announcements have had a clear impact on the timing of large-ticket purchases, notably autos, but there are few signs yet that tariffs are leading to a general pullback in consumer spending,” Michael Pearce, deputy chief economist at Oxford Economics toldReuters. Despite the decline, Pearce and other economists expect a more marked slowdown later in the year as tariffs begin to erode disposable income.

In a separate report, industrial production in the US fell by 0.2 per cent in May, missing expectations for a slight increase. This marks the second consecutive month of disappointing industrial performance, following a 0.1 per cent increase in April.

Manufacturing output rose by just 0.1 per cent, undershooting forecasts and pointing to continued sluggishness in factory activity. Capacity utilisation, a gauge of how fully firms are using their resources, also fell to 77.4 per cent in May, signalling lower-than-expected demand for industrial goods.

The retail and industrial data suggest that US economic momentum may be slowing. Economists are closely watching the second quarter, with the Atlanta Fed forecasting a 3.8 per cent annualised GDP growth rate, largely due to a reversal in imports. However, the labour market is showing signs of deceleration, and concerns about rising costs due to tariffs are expected to weigh on household spending.

Mixed picture in categories

While overall retail sales faltered, there were some pockets of strength. Online retail sales rose by 0.9 per cent, and clothing retailers saw a 0.8 per cent increase in sales.

Furniture sales soared 1.2 per cent, while sales in sporting goods and hobby stores rose 1.3 per cent. These gains in non-essential goods suggest that while some consumers are pulling back on discretionary spending, others remain willing to spend on select items.

However, categories like automotive sales and services, including dining out, experienced noticeable declines. Auto sales fell 3.5 per cent, marking a significant drop after a surge earlier in the year. Spending at service stations also fell by 2.0 per cent due to a drop in gasoline prices, while receipts at food services and drinking places fell 0.9 per cent, a key indicator of household spending habits.

Core retail sales show modest improvement

Core retail sales, which exclude automobiles, gasoline, building materials, and food services, showed modest growth of 0.4 per cent in May, following a revised 0.1 per cent decline in April.

This figure is closely tied to consumer spending, which accounts for more than two-thirds of the US economy. Although this uptick suggests a slight improvement, economists are cautious about future growth, given the broader slowdown in the labour market and the resumption of student loan payments for millions of Americans.

The Federal Reserve is also closely monitoring these developments. Fed officials are expected to keep interest rates unchanged in their upcoming meeting, with policymakers focusing on the impact of tariffs and geopolitical tensions in West Asia on economic growth.