American consumers are facing a sharp decline in spending following a recent surge driven by tariff-related purchases earlier this spring. The Commerce Department reported a 0.9% drop in retail sales for May compared to April, marking a significant drop from a slightly revised April decline of 0.1%. This decrease represents the largest monthly decline since January and surpassed economists’ expectations, who had predicted a 0.7% decrease, as seen in a FactSet poll.
Although these figures account for seasonal fluctuations, they do not include inflation. The downturn is primarily attributed to a steep fall in automobile sales. When excluding the automotive sector, retail sales experienced a more modest decrease of 0.3%.
In the spring months, many Americans rushed to purchase big-ticket items, notably vehicles, in an attempt to evade the tariffs imposed by President Donald Trump. This preemptive spending resulted in a notable surge in retail sales in March, but since then, spending has sharply declined.
The May report adds to growing concerns about consumer apprehension regarding spending, a trend that, if it continues, could have significant ramifications for the broader economy. “Any time you get a pullback in consumer spending, it tends to lead to a slowdown in overall GDP and broader economic activity, which feeds into slower sales, hiring and in turn slower income growth,” said Gregory Daco, chief economist at Ernst & Young, in an interview with CNN’s Matt Egan. He warned, “The real risk is we have the onset of a more pronounced slowdown in the economy, driven not necessarily by the actual tariffs but instead by a surge in anxiety that led to a front-loading in demand and will now lead to a demand cliff.”
A close examination of the report reveals that retail spending declined across most sectors last month, particularly at automobile dealerships. Sales of cars and auto parts fell by 3.5% in May, marking the largest monthly decline since June 2024. Additionally, spending dropped significantly at gas stations — largely influenced by falling energy prices — and home improvement stores, which saw declines of 2% and 2.7%, respectively.
Restaurants and bars also experienced a downturn, with spending dropping by 0.9% in May, the first decrease since February and the most significant since February 2023. Typically, when consumers tighten their budgets, discretionary expenditures, such as dining out, are among the first to be reduced.
On a positive note, sales in May increased for specialty retailers and e-commerce platforms.
Looking ahead, consumer spending remains crucial for the U.S. economy, and its trajectory heavily relies on the state of the labor market. David Russell, global head of market strategy at TradeStation, noted in an analysis, “Consumers are on the sidelines as the job market weakens and Americans grapple with higher prices. It could be a pause before confidence rebounds, or a warning before a broader slowdown.”
Currently, the labor market appears stable, with an unemployment rate of 4.2% and steady job growth, according to Labor Department data. However, economists caution that if job losses transpire and unemployment escalates, consumer spending is likely to diminish as individuals tighten their belts.
The uncertainty prevalent during the Trump administration has been indicated in various consumer surveys for months. Although consumer sentiment may not have reliably predicted spending patterns in the past, recent data showcasing actual economic activity suggests growing pessimism may finally be influencing consumer behavior. Chris Rupkey, chief economist at Fwdbonds, commented, “The economy is slowing with consumers nervous about exactly what lies ahead, and are choosing to save overall rather than flash some cash at the shops and malls. This is not an economic report that exudes confidence in the future, even if the economy is likely to miss a recession for now.”