In July, U.S. retail sales experienced their first decline in nine months, suggesting a slowdown in consumer spending as the benefits of a large tax refund started to diminish.
This unexpected decrease, reported by the Commerce Department, may also be linked to Amazon moving its Prime Day from July to June, along with various promotions from other retailers.
Additionally, falling gasoline prices impacted sales at gas stations.
Retail sales dropped by 0.6% in July, after a modest increase of 0.2% in June. Notably, this decline marks the largest since October of the previous year and the most significant in the last 14 months.
The report followed a recent surge in job losses and moderate inflation rates, reinforcing market speculation that the Federal Reserve might hold off on raising interest rates in September unless there’s unexpected growth in August’s data.
“This indicates a significant slowdown in real consumer spending growth for the third quarter,” stated Sal Guatieri, an economist at BMO Capital Markets. “Coupled with weak employment numbers and stagnant core CPI inflation, it seems likely that the Federal Open Market Committee will remain cautious in September.”
In July, retail sales saw a 5% increase compared to the same month last year. However, economists had anticipated a slight rise of 0.1%, with expectations varying from a 0.5% decrease to a 0.7% gain.
The decline in retail sales was primarily driven by a 2.2% drop in non-store retailers, along with a 1.8% decrease in automotive sales. Electronics and home appliance stores recorded a 0.5% dip, while gas station sales fell by 0.9% due to the drop in gas prices.
On a brighter note, clothing stores saw a 1.9% rebound, perhaps aided by back-to-school shopping.
Consumers Still Dining Out
Sales at restaurants, the only service category tracked, increased by 0.5%, following a 0.4% rise in June. This metric is seen as a key indicator of household financial health.
There were gains in sales across furniture, building supplies, garden supplies, general merchandise, and health and personal care sectors. Meanwhile, sales in sporting goods and hobby shops remained stagnant.
Earlier this year, large tax refunds helped mitigate the impact of rising gasoline prices sparked by geopolitical tensions. However, economists note that these refunds have diminished, and the extent of the decline in consumer spending was unexpected, especially as household assets grew with the stock market’s rise.
Despite a strong performance in the market this year, with the S&P 500 index up by 14% after a 16.4% jump in 2025, some economists believe that spending will not reverse completely.
Economists from PNC Financial attribute a shift in consumer behavior to increased sensitivity to rising gas prices in July, suggesting a less favorable environment for spending in the latter half of the year. Still, they mention that higher-income and older households are leveraging their wealth to continue spending.
Excluding autos, gasoline, building materials, and food services, retail sales fell by 0.4% last month, following a revised increase of 0.4% in June. Analysts had projecting a rise of 0.3% for these core retail sales, which are closely aligned with the consumer spending portion of GDP.
Personal consumption rose at an annualized rate of 3.2% in the second quarter, amidst a broader economic growth of 1.5% last quarter.
