U.S. retail sales declined 0.6% in July, marking the steepest drop in more than a year and falling short of economists' expectations for a slight increase. The Commerce Department data released Friday indicated a decrease compared to a revised 0.2% gain in June.
This downturn followed a period of increased spending in April and May, which was attributed to Americans utilizing government tax refunds. The July decline has prompted some economists to voice concerns about the sustainability of consumer spending, a key driver of the U.S. economy amidst persistent inflation and rising gasoline prices.
The sluggish sales figures come on the heels of weaker-than-expected jobs data released the previous week, both suggesting a potential slowdown after a strong performance in consumer and business spending during the first half of the year. Concurrently, the University of Michigan's consumer sentiment index revealed a more pessimistic outlook among consumers in August, likely influenced by persistently high prices.
While many economists still anticipate solid economic growth for the third quarter, some have revised their forecasts downward following the latest retail sales report. The July figures were influenced by decreased sales at gas stations, where revenue fell 0.9%. However, fuel prices began to rise later in the month, and by August 13, the national average for a gallon of gas reached $4.08, an increase from $3.85 a month prior and significantly higher than the $3.16 paid a year ago.
Excluding sales at gas stations and auto dealerships, overall retail sales in July saw a 0.2% decrease. Business at motor vehicle and parts dealers dropped 1.8%, a reversal from a 1.9% increase in June that was bolstered by promotional incentives. Sales of electronics and appliances also declined by 0.5%. Online sales experienced a 2.2% drop from June, a month that included Amazon's Prime Day event.
The performance of the "control group," which excludes volatile categories like food services, autos, building materials, and gas stations and is used to gauge economic growth, fell 0.4% in July. Heather Long, chief economist at Navy Federal Credit Union, described the July retail sales as "disappointing on all levels" and noted that "American consumers are showing signs of fatigue."
Despite the broad decline, some sectors showed resilience. Clothing and accessories stores, furniture and home furnishing stores, and building material and garden supply merchants reported gains. The restaurant sector, a key services category, saw a healthy 0.5% increase.
Bernard Yaros, lead U.S. economist at Oxford Economics, suggested it might be premature to conclude a consumer retreat, citing a "broadly balanced" job market and continued spending by affluent households benefiting from stock market gains. He noted that while the latest numbers suggest a need to lower spending forecasts, the consumer remains a significant economic force.
Inflation data for July showed a slight decrease, with consumer prices rising 3.4% year-over-year, down from 3.5% in June. On a monthly basis, prices increased by 0.1%. This moderation follows a surge in May, largely due to high gas prices. However, inflation remains higher than the 2.4% recorded before the conflict in the Strait of Hormuz.
Retailers are preparing for the upcoming holiday season, with many noting that consumers are actively seeking discounts. The back-to-school shopping season has seen strong early performance for off-price retailers, consumer electronics, and office supply stores, as consumers look to take advantage of deals. Major retailers like Walmart and Target are emphasizing lower prices on back-to-school items to attract shoppers.
Retailers are scheduled to begin reporting quarterly earnings next week. Stephen Yalof, CEO of outlet mall operator Tanger, observed an increase in foot traffic during the summer, partly due to the World Cup festivities and a trend of Americans vacationing domestically to save money. He stated that the company is "rewarding with value" to encourage more frequent customer visits.