Retail sales slide in May on lower gas, auto sales amid tariff uncertainty

May retail sales unexpectedly fell 0.9%, driven by declines in gasoline (-2%) and auto purchases (-3.5%), exceeding economists' expectations of a 0.6% decrease, though some economists attribute this to temporary factors like tariff front-running and weather. Despite the headline decline, the control group, which factors into GDP, rose 0.4%, suggesting continued healthy consumption; however, economists anticipate tariff impacts on prices to peak in August, potentially leading to weaker consumer spending in the latter half of 2025.

Analysis

May's retail sales report presented a mixed view of U.S. consumer health, with headline sales unexpectedly declining 0.9%, surpassing the consensus forecast for a 0.6% fall and worsening from April's revised 0.1% decrease. This downturn was largely driven by notable contractions in gasoline sales (-2.0%), auto purchases (-3.5%), and building materials (-2.7%), occurring amidst the ongoing implementation of President Trump's tariffs. However, some economists, like Bradley Saunders of Capital Economics, posit that this weakness may be transitory, attributing it to the conclusion of tariff-related front-loading activities and unfavorable weather, with a potential rebound anticipated in June. Supporting a more optimistic underlying trend, the retail sales control group – a direct input into GDP calculations – rose 0.4%, exceeding the 0.3% expectation and reversing April's 0.1% decline. This suggests continued, albeit selective, resilience in overall consumption, as also noted by Saunders. Despite this, sales excluding autos and gas fell 0.1%, contrary to expectations of a 0.3% rise. The report indicates that, to date, increased tariffs have not substantially fueled inflation, while labor market data suggests a gradual cooling. Morgan Stanley's chief U.S. economist, Michael Gapen, affirmed that the U.S. consumer currently appears healthy, but projects that tariff-induced price increases will likely peak in August, leading to weaker real spending and consumer spending growth in the latter half of the current year. Furthermore, Gapen and other economists anticipate a more significant shift in consumer strength in the second half of 2025.

Key Decisions for Investors

• Investors should closely scrutinize upcoming retail sales data, particularly for June, to assess whether May's headline decline was an anomaly or the beginning of a sustained weakening, focusing on both the headline and control group figures.
• Given the expectation that tariff impacts on prices will peak in August, potentially softening consumer spending in the latter part of this year and with further concerns for the second half of 2025, a review of allocations towards consumer discretionary sectors sensitive to price elasticity and reduced spending may be prudent.
• Monitor key economic indicators such as inflation rates and labor market data in the forthcoming months, as these will provide crucial insights into the sustainability of consumer purchasing power and the broader economic consequences of current trade policies.