U.S. retail sales fall sharply in May as rush to beat tariff price hikes slows

U.S. retail sales dropped more than expected in May, weighed down by a decline in motor vehicle purchases as a rush to beat potential tariff-related price hikes ebbed, but consumer spending remains supported by solid wage growth for now.

The largest decline in sales in four months reported by the U.S. Commerce Department on Tuesday added to moderate job growth last month in suggesting that domestic demand was softening.

Federal Reserve officials meeting on Tuesday and Wednesday are expected to leave the U.S. central bank’s benchmark overnight interest rate unchanged in the 4.25 per cent to 4.50 per cent range while monitoring the economic impact of tariffs and tensions in the Middle East.

“Tariff announcements have had a clear impact on the timing of large-ticket purchases, notably autos, but there are few signs yet that tariffs are leading to a general pullback in consumer spending,” said Michael Pearce, deputy chief economist at Oxford Economics.

“We expect a more marked slowdown to take hold in the second half of the year, as tariffs begin to weigh on real disposable incomes.”

Retail sales fell 0.9 per cent last month, the largest decrease since January, after a downwardly revised 0.1 per cent dip in April, the Commerce Department said.

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Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, decreasing 0.7 per cent after a previously reported 0.1 per cent gain in April.

Sales last month were also held down by lower receipts at service stations because of a decline in gasoline prices.

U.S. President Donald Trump’s sweeping tariffs have raised fears over global growth, restraining oil prices. But hostilities between Israel and Iran have boosted oil prices. Unseasonably cooler weather likely also hurt sales. A 25 per cent duty on imported motor vehicles and trucks came into effect in April.

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Receipts at auto and parts dealerships tumbled 3.5 per cent after decreasing 0.6 per cent in April. Sales at building material and garden equipment and supplies dealers dropped 2.7 per cent.

Receipts at service stations fell 2.0 per cent, while those at electronics and appliance stores slipped 0.6 per cent.

Sales at food services and drinking places, the only services component in the report, declined 0.9 per cent. Economists view dining out as a key indicator of household finances.

But online sales jumped 0.9 per cent, while those at clothing retailers increased 0.8 per cent.

Furniture store sales soared 1.2 per cent. Sporting goods, hobby, musical instrument and book store sales advanced 1.3 per cent.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.4 per cent in May after an upwardly revised 0.1 per cent fall in April. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have dropped 0.2 per cent in April.

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May’s solid rise and upward revision to April suggest a modest pickup in consumer spending this quarter after it slowed sharply in the January-March quarter.

The Atlanta Fed is currently forecasting GDP rebounding at a 3.8 per cent annualized rate in the second quarter. The anticipated surge will largely reflect a reversal in imports, which have fallen sharply as the frontloading of goods fizzled. The economy contracted at a 0.2 per cent pace in the January-March quarter.

Downside risks to consumer spending are, however, rising. The labour market is slowing, student loan repayments have resumed for millions of Americans and household wealth has been eroded amid tariff-induced stock market volatility.

The uncertain economic environment could lead to precautionary saving.

“Past experience suggests the biggest price rises will come in July, though the full impact of the tariffs likely will emerge across the whole of the remainder of the year,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

“That will weigh on growth in real incomes at the same time as a softening labour market will make people cautious with discretionary spending. Meanwhile, households no longer have ’excess savings’ or strong growth in stock prices to spur them to spend.”