Americans experienced a significant decrease in spending last month following a surge in purchases earlier in the year driven by tariffs. Retail sales in May dropped by 0.9%, a sharp decline from April's 0.1% decrease, marking the largest monthly drop since January. The figures, adjusted for seasonal changes but not inflation, were worse than the 0.7% decrease predicted by economists.

The decline was primarily attributed to a significant drop in car sales. Excluding car purchases, retail sales saw a more modest 0.3% decrease. The rush to buy big-ticket items, especially cars, before the imposition of President Trump's tariffs led to a spike in retail sales in March, but spending has slowed down considerably since then.

This recent report suggests that Americans are becoming more cautious with their spending habits, which could have broader implications for the economy if this trend continues. Any reduction in consumer spending typically results in a slowdown in overall economic activity, leading to slower sales, hiring, and income growth.

Details from the report

Retail spending declined across most categories in May, particularly at car dealerships where sales dropped by 3.5%, the largest monthly decline since June 2024. Sales were also down at gasoline stations and home improvement stores by 2% and 2.7%, respectively. However, spending at bars, restaurants, specialty stores, and online retailers saw an increase.

Future economic outlook

Consumer spending plays a crucial role in the US economy, and its direction moving forward hinges on the labor market. With unemployment at a low 4.2% and employers continuing to add jobs at a steady pace, the labor market remains stable. However, if job losses increase and unemployment rises, consumer spending is likely to weaken as individuals become more cautious with their finances.

The prevailing uncertainty caused by the Trump administration has been evident in consumer sentiment surveys for months. While sentiment has not always accurately predicted spending behavior, recent 'hard data' indicates that pessimism may finally impact consumer spending. Consumers are saving more and spending less, reflecting nervousness about the future economic outlook.

Despite the current economic conditions, analysts believe that the economy is unlikely to enter a recession at this time.