Retail Spending Falls For Second Month In A Row As Consumers Grow Anxious

Retail spending declined 0.9% in May, marking the second consecutive month of decreased spending driven primarily by a 3.5% drop in motor vehicle and car parts sales, signaling increased consumer caution amid trade deal uncertainties and geopolitical tensions. While other sectors saw mixed results, economists suggest potential for further spending deceleration throughout the year, raising concerns about broader economic implications if consumer spending continues to weaken, potentially leading to layoffs and higher unemployment. Despite the recent downturn, some analysts remain cautiously optimistic, noting that excluding auto and gas, retail spending has only declined in one month this year.

Analysis

U.S. retail spending registered a 0.9% decline in May, marking the second consecutive month of contraction and signaling growing consumer caution amidst anxieties over potential tariffs stemming from ongoing trade negotiations with China and the European Union. This downturn was significantly influenced by a 3.5% drop in motor vehicle and car parts sales, a sector that experienced an 8.9% surge in March attributed to consumers attempting to pre-empt anticipated tariffs. The Census Bureau also revised April's retail sales from a marginal 0.1% increase to a 0.1% decrease, underscoring the weakening trend. Consumers also curtailed spending on food, with grocery and liquor store sales down 0.7% and restaurant/bar expenditures falling 0.9%. While spending on building materials, electronics, and healthcare also declined, sectors like furniture, clothing, and online retail saw slight increases. Despite these figures, the Federal Reserve Bank of Atlanta's GDP forecast for Q2 2025, though revised down to 3.5% from 3.8%, still indicates growth. Gasoline spending fell 2% in May, likely due to lower prices, but analysts caution this relief may be temporary given geopolitical risks, such as the Israel-Iran conflict, potentially impacting oil shipments through the Strait of Hormuz. Experts like Lydia Boussour of EY-Parthenon anticipate a "sharp deceleration in spending" for the remainder of the year, while Chris Zaccarelli of Northlight Asset Management warns that sustained consumer weakness could trigger layoffs and a negative economic cycle, though he also acknowledges the possibility of the current decline being a "one-off," especially since retail spending ex-autos and gasoline has only fallen once this year. The moderately negative sentiment and cautious tone reflect this uncertain outlook and the potential market impact of these evolving consumer trends.

Key Decisions for Investors

• Investors should closely monitor upcoming retail sales figures and labor market data for further indications of consumer health and spending patterns.
• It may be prudent to consider adopting a more cautious stance towards consumer discretionary sectors, particularly those sensitive to trade policy shifts and declining big-ticket purchases, until greater clarity emerges on trade negotiations and their impact.
• Investors should evaluate the specific resilience within retail, as certain sub-sectors like online retail and general merchandise showed some strength, and note that excluding volatile auto and gas sales, the underlying consumer spending trend appears less dire.