In July, Americans significantly cut back on retail spending, despite inflation remaining high. This brings up new concerns regarding the potential weakening of the U.S. economy, especially with ongoing supply chain disruptions tied to the conflict in Iran.
According to a report from the Commerce Department released on Friday, retail sales dropped by 0.6% from June, marking the steepest decline since May 2025 and falling short of economists’ predictions for a slight uptick. The Federal Reserve acknowledged that the conflict in the Middle East has created supply shocks—particularly in energy—that have contributed to persistently high inflation.
At the same time, the central bank cautioned that overall household spending has only been growing at a modest pace.
For many American families, the situation is pretty straightforward: they’re dealing with rising prices while facing signs of decreased demand in the economy. This combination results in diminished purchasing power and fewer chances to manage yet another increase in costs.
The headline retail sales figure is nominal, meaning it’s not adjusted for inflation. According to government data, consumer prices rose another 0.1% in July, indicating that the actual volume of goods sold likely fell more than the reported retail figures suggest. A rough calculation for inflation suggests that the July decline in real terms could be closer to 0.7%, although the exact number varies based on the method used for adjustments.
Concurrently, American confidence in the economy is wavering. The University of Michigan’s preliminary consumer-sentiment index dropped to 51 in August from 55.2 in July, interrupting a two-month trend of improvement. This decline was especially notable among older and lower-income groups, as well as those without college degrees.
Overall, the data paints a picture of American consumers—who are responsible for about two-thirds of economic activity—starting to pull back on their spending.
The downturn isn’t limited just to gasoline sales; while gas station sales fell by 0.9%, overall retail sales excluding gasoline still saw a 0.6% decline. A measure of core retail sales, often seen as a barometer for true consumer demand, dropped by 0.4%, missing forecasts. Online sales fell 2.2%, and both motor vehicle and parts dealers experienced a downturn. However, sales at restaurants and bars rose by 0.5%.
Though nominal retail sales in July were still 5% higher than a year earlier, that figure reflects the increased prices consumers are facing.
The labor market is presenting more warning signs as well. In July, employers cut 23,000 jobs, and the labor-force participation rate dipped to 61.4%. The unemployment rate remained relatively low at 4.1%, partly because more individuals exited the workforce, while wage growth has slowed to an annual rate of 3.2%.
The inflation tied to the Iran conflict could mask a deeper deterioration in the underlying economy. Temporary spikes in energy costs could elevate measured inflation even as households reduce discretionary spending and businesses deal with diminished demand, ultimately causing a slowdown in real economic activity.
The Fed’s monetary policy report from July noted that inflation has indeed risen this year, influenced by supply shocks, including those from the Middle East conflict. However, they also highlighted that household consumption had only increased “very modestly” during the first quarter.
