US Consumers Cut Spending as Confidence Weakens
In July, Americans reduced their spending at retail establishments, reflecting a decline in their confidence in the economy. For an economy that relies on consumer spending, that might be a worrying mix. According to the Commerce Department’s report, retail sales experienced their worst monthly decline since May 2025 in July, down 0.6% from the previous month. This is down from June’s 0.2% decline. The numbers are revised to account for changes in the seasons, but not for inflation. Separate research out of the University of Michigan found that after two months of growing sentiment, consumer sentiment fell roughly 8% to a preliminary score of 51 at the beginning of this month. Both results were lower than experts had predicted in surveys conducted by data firm FactSet, indicating that consumer spending, which is crucial to the US economy, is facing some challenges. Roughly two-thirds of economic growth is fuelled by people’s spending. “American consumers are showing signs of fatigue,” Heather Long said.
American consumers have shown remarkable resiliency in the face of multiple economic storms, including the Federal Reserve’s aggressive rate-hiking campaign from 2022–2023, which aimed to rein in inflation, and the unpredictability that accompanied President Trump’s second term in office. Due in significant part to the continually low unemployment rate and the strong stock market, which has increased household wealth for many, spending has remained stable. However, just because Americans were spending money didn’t imply they weren’t hurting from price increases. There is a widespread “belief that high prices will continue to be burdensome,” according to Joanne Hsu. Along with the decline in energy prices in July, the retail report shows that sales at petrol stations declined 0.9%. Even after removing such sales, retail spending fell 0.6% in July, lowering the overall reading. Economists had anticipated a 0.4% increase in retail sales for July, but the actual result was a 0.44% decline, suggesting that the measure that is considered a proxy for underlying demand was even worse. The largest monthly drop was 2.2% in online sales, followed by a 2% drop at auto dealerships. At the same time, last month, consumers spent 0.5% more at eating and drinking establishments.
“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.” Reflecting the broader expansion in the US economy, including prices, retail sales were up 5% year-over-year in July, however they are down from a 3.5-year peak hit in May. Wealthier Americans, whose purchasing power is largely fuelled by their expanding stock market portfolios, have been the primary drivers of America’s recent spending binge. 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. After a brief uptick due to larger tax refunds and a subsequent dampening effect from rising energy costs, consumers have been cutting back on their discretionary spending since the spring. However, if the job market is strong, spending might not fall completely.
Government statistics shows that the labour force participation rate dropped to its lowest point since 1976 (excluding the epidemic), and that firms lost 23,000 jobs in July. Yet, at 4.1%, unemployment is at a record low, and the ageing population is a contributing factor to the fall in labour force participation. It is less likely that the Federal Reserve would raise interest rates for the first time since July 2023 if the labour market starts to weaken and consumers start to reign in their spending. “Markets may embrace the data in the near term because it strengthens the case for avoiding rate hikes,” said Ellen Zentner. With oil prices skyrocketing due to the war with Iran, the Federal Reserve is faced with the increasingly pressing issue of inflation. The responsibility for ensuring full employment also falls on the central bank. A daring half-point rate drop was delivered by the Fed in 2024 in anticipation of a worsening labour market. Recent economic data suggests that the labour market may be the bigger issue, which could alter officials’ calculations regarding rate hikes to battle inflation.
