Powerful Consumers Beneath Weak Retail Sales Headlines
Retail sales saw a decline in May, but if you look a little closer, American consumers still appear strong. Investors and analysts who focus only on headline drops might miss the real picture. The consumer economy is essentially growing, despite rising interest rates and changing tariff policies.
The Commerce Department reported a 0.9% decrease in retail and foodservice sales last month, following a minimal decline of 0.1% in April. At first glance, this may hint at a slowdown. However, it’s probably a mistake to view this as a long-term trend. The more crucial measure of retail spending, which is referred to as “control groups” affecting GDP, actually increased by 0.4%, which defies expectations.
Most of the decline in May can be linked to falling gas prices and tariff-induced buying sprees earlier in the spring. Auto sales surged in March and April but dropped sharply in May as consumers rushed to make purchases ahead of anticipated tariff hikes. Sales at gas stations also fell, reflecting lower prices rather than decreased demand. The latest Consumer Price Index (CPI) report indicated a 3.0% drop in gasoline prices in May—one of the largest monthly decreases. This isn’t bad news; in fact, it’s good for households.
Growth Where It Matters
To better understand the actual economy, we’ve adjusted the retail sales data for inflation using category-specific CPI information. Since the start of the year, which aligns with President Trump’s second term, actual growth is visible in nearly every significant sector:
- Automotive and Parts: +5.9% growth
- Furniture and Home Furnishings: +6.4% growth
- Clothing and Accessories: +4.8% growth
- Non-store (online) retail: +4.7% growth
- General Merchandise: +1.9% growth
- Gasoline Stations: +3.0% growth despite price drops
- Restaurants and Bars: +1.9% growth, even with 4.2% food price inflation away from home
Only two main categories—Electronics and Building Materials—have shown negative real growth this year so far.
Overall, inflation-adjusted retail and foodservice sales have grown by 1.8% since the beginning of the year. This indicates meaningful real growth and suggests that consumer demand remains sturdy. This holds true even with shifts in policies towards investment and trade rebalancing.
Concerns in the Restaurant Sector
However, not every detail from May is encouraging. A noteworthy weak spot was the significant decline in restaurant and bar sales—the largest drop in over two years. Dining out is a discretionary choice and can be a sensitive indicator of consumer sentiment. Unlike car purchases, there isn’t a clear pre-conditioning or seasonal factor to justify the decline. Though this category is nominally up 6.1% and essentially up 1.9%, it’s a trend worth monitoring. It may indicate shifting consumer focus, especially in high-income discretionary spending.
Lower Inflation and Rising Spending
A combination of declining inflation and steady wage growth continues to support real disposable income. In May, the headline CPI rose only 0.1%, while core inflation—excluding food and energy—reached 0.2%. In the first five months of 2025, prices have increased at an annual rate of just 2.3%. There aren’t clear signs that tariffs will escalate, although they aren’t exerting pressure on overall price levels.
Right now, actual spending is crucial. Monthly fluctuations in nominal figures, especially for categories like gas and cars, can easily skew perception. Nonetheless, sustainable growth in essential sales, particularly in discretionary areas like apparel and household goods, indicates that the consumer sector might be more resilient than many assume.
If analysts persist in downgrading their annual profit expectations, they might misinterpret the trajectory of the U.S. economy. Investors banking on slowing consumer activity might find themselves surprised as GDP in the second quarter could outperform expectations. Meanwhile, the Federal Reserve is likely to maintain consistent rates this week but is carefully monitoring whether actual spending continues to exceed forecasts.
The current economic landscape—characterized by expansion, solid consumer activity, and renewed trade power—not only appears sustainable but possibly stabilizing. What seems like a slowdown at first could simply be the result of tariff and policy-related shifts. Beneath these changes, American consumers are still making progress.
