US retail sales fell more than expected in May, weighed down by a decline in motor vehicle purchases as a wave of early buying to avoid price hikes due to tariffs began to subside. However, consumer spending remained supported by strong wage growth.
The Commerce Department through the Census Bureau reported on Tuesday that retail sales fell 0.9% last month, after being revised down to a 0.1% decline in April.
Economists surveyed by Reuters had expected retail sales, which mostly involve goods and are not adjusted for inflation, to fall 0.7%, after previously reporting a 0.1% increase in April. Their estimates ranged from a 1.7% drop to a 0.3% increase.
Sales were also weighed down by lower receipts at gas stations due to falling gasoline prices. President Donald Trump’s massive tariffs have raised concerns about global growth, curbing oil prices. However, tensions between Israel and Iran have caused oil prices to surge. Colder-than-usual weather also contributed to the sales decline.
The Federal Reserve's two-day policy meeting begins Tuesday, with the benchmark interest rate expected to remain in a range of 4.25%-4.50% as policymakers monitor the economic impact of tariffs and tensions in the Middle East.
A 25% tariff on imported motor vehicles and trucks went into effect in April. However, retail sales excluding vehicles, gasoline, construction materials and food services rose 0.4% in May after being revised down to a 0.1% decline in April. These sales, known as core retail sales, are closely tied to the consumer spending component of gross domestic product (GDP).
Consumer spending, which accounts for more than two-thirds of the economy, fell sharply in the first quarter and is likely to remain moderate in the April-June quarter. The Atlanta Fed now forecasts GDP growth to rebound to an annualized 3.8% in the second quarter largely due to a sharp decline in imports, after initial purchases of goods began to ease. The economy contracted at a 0.2% rate in the January-March quarter.
Downside risks to consumer spending are increasing. The labor market is slowing, student loan repayments have resumed for millions of Americans, and household wealth is being eroded by tariff-driven stock market volatility. An uncertain economic environment can encourage cautious saving habits.
