Americans pulled back on their retail spending in July and their confidence in the economy is taking a hit. That’s a potentially troubling combination for a consumer-driven economy.

Retail sales fell 0.6% in July from the prior month, the Commerce Department said Friday, down from June’s 0.2% and marking the steepest drop since May 2025. Those figures are adjusted for seasonal swings but not inflation. A separate report from the University of Michigan showed that consumer sentiment declined about 8% early this month to a preliminary reading of 51, ending a two-month streak of rising sentiment.

Both reports came in worse than economists had estimated in polls by data firm FactSet, showing that the lifeblood of the US economy — consumer spending — is coming under pressure. People’s dollars account for about two-thirds of economic growth.

“American consumers are showing signs of fatigue,” Heather Long, chief economist at Navy Federal Credit Union, said in commentary issued Friday.

For years, the US consumer has proven resilient through a series of economic challenges, such as the Fed’s aggressive rate-hiking campaign to tame inflation from 2022 to 2023 and the uncertainty during President Donald Trump’s second term. Spending has held up, in large part due to persistently low unemployment and a buoyant stock market that has boosted household wealth for many.

But continued spending didn’t mean Americans weren’t feeling the sting of higher prices. Joanne Hsu, the Michigan survey’s director, said in a release Friday that there’s a pervasive “belief that high prices will continue to be burdensome.”

Sales at gasoline stations fell 0.9% in July, according to the retail report, coinciding with the drop in energy prices that month. That dragged down the overall reading for July, but when excluding those sales, retail spending was still down 0.6%. And a measure of retail spending that strips out volatile categories and is seen as a proxy for underlying demand also came in worse than expected, declining 0.44% in July, compared to the 0.4% gain economists projected.

Online sales were down 2.2% in July, the biggest decline of all categories, followed by a 2% decrease at car dealerships. Meanwhile, spending at restaurants and bars climbed 0.5% last month.

“Some of the pullback in July is due to Amazon Prime Days, Walmart+ and Target Circle deals happening in June,” Long said. “But even with lower spending on gas in July, consumers weren’t eager to spend elsewhere.”

Retail sales were up 5% in July from a year earlier, reflecting the broader growth in the US economy, including of prices, though it’s down from a 3.5-year high reached in May. And the bulk of America’s shopping spree in recent years has been driven by wealthier consumers, who are likely supported by their growing stock market portfolios.

Hsu said that weaker sentiment early this month was “pervasive across various demographic groups, notably large reductions were seen among older consumers, lower-income consumers, and those without a college degree.” They were joined by Republicans, who showed the strongest monthly decline in sentiment across the political spectrum, according to the Michigan survey.

Retail spending has trended lower since the spring as the boost from bigger tax returns faded and higher energy prices took a bite out of people’s paychecks. But spending may not decline outright, so long as the labor market remains intact.

In July, employers shed 23,000 jobs and the labor force participation rate shrank to the lowest since 1976, outside of the pandemic, according to government data. Unemployment, however, remains historically low, at 4.1%, and some of the decline in labor force participation reflects the aging population.

If the labor market does begin to falter and consumers rein in their spending, that would at least lower the chances the Federal Reserve raises interest rates for the first time since July 2023. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said in an analyst note Friday “markets may embrace the data in the near term because it strengthens the case for avoiding rate hikes.”

The Fed is tasked with addressing inflation, which has become a growing problem as the war with Iran has pushed up energy prices. But the central bank is also responsible for maintaining maximum employment. In 2024, the Fed acted decisively to get ahead of a weakening in the labor market, delivering a bold, half-point rate cut. Officials have recently begun to mull raising rates to combat inflation, but that calculus could change if economic figures show the labor market might be the greater problem. (CNN)

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