U.S. Retail Sales Disappoint in May, Highlighting Broader Economic Uncertainty

Retail sales in the U.S. declined more than anticipated in May, dropping 0.9% following a downwardly revised 0.1% dip in April, according to data from the Commerce Department’s Census Bureau. The decline exceeded market expectations for a 0.5% decrease and was largely driven by a slowdown in motor vehicle purchases, as urgency to buy ahead of potential tariff-related price increases subsided.

Core retail sales—which exclude autos, gasoline, building materials, and food services and are a key gauge of consumer spending used to calculate GDP—fell 0.3% in May after remaining flat in April. Analysts had expected a 0.2% gain.

Consumer spending, which makes up over two-thirds of U.S. economic activity, slowed sharply in the first quarter and appears to be moderating in the second. While wage growth has offered some support, several downside risks are emerging. A cooling labor market, the resumption of student loan repayments for millions of Americans, and a decline in household wealth due to tariff-driven stock market volatility are all weighing on consumer sentiment. Uncertainty around the broader economic outlook is also encouraging more precautionary saving.

The Federal Reserve’s Federal Open Market Committee began its two-day policy meeting, with markets broadly expecting the central bank to hold interest rates steady in the 4.25%–4.50% range as it assesses the impact of tariffs and rising geopolitical tensions, particularly in the Middle East.

The Fed currently projects a 3.8% annualized rebound in GDP for the second quarter, largely attributed to a sharp reversal in imports following earlier frontloading of goods. This follows a 0.2% contraction in the first quarter.

While sweeping U.S. tariffs have raised concerns over global growth and weighed on oil prices, escalating conflict between Israel and Iran has lent support to energy markets. Meanwhile, unseasonably cool weather is expected to further temper retail sales.

Economists anticipate that the full impact of tariff-related price increases will become more evident in July, with lingering effects expected to drag on consumption through the end of the year.