U.S. retail sales saw a larger-than-expected drop in May, impacted by a decrease in motor vehicle purchases as consumers rushed to avoid potential tariff-related price increases. Despite this decline, consumer spending remains steady thanks to strong wage growth. The U.S. Commerce Department reported the largest sales decrease in four months, suggesting a softening in domestic demand.

Federal Reserve officials are expected to keep interest rates steady while monitoring the economic impact of tariffs and tensions in the Middle East. Although large-ticket purchases, especially autos, have been affected by tariff announcements, there is no widespread pullback in consumer spending yet. However, economists predict a slowdown in the second half of the year as tariffs start affecting disposable incomes.

Retail sales fell by 0.9% in May, the biggest drop since January, following a revised 0.1% decrease in April. Economists had anticipated a 0.7% decline after April's 0.1% gain. Factors contributing to the decline included lower gas prices affecting service stations and the impact of Trump's tariffs on imported vehicles and trucks.

Auto and parts dealerships saw a 3.5% decline in sales, while building material and garden equipment stores dropped by 2.7%. Service stations and electronics and appliance stores also experienced decreases in sales. However, online sales and clothing retailers saw an increase, along with furniture stores and sporting goods retailers.

Despite the drop in May, consumer spending is expected to pick up this quarter, following a slowdown in the previous quarter. The Atlanta Fed forecasts a rebound in GDP in the second quarter, largely due to a reversal in imports. However, downside risks to consumer spending are on the rise due to a slowing labor market, student loan repayments, and stock market volatility caused by tariffs.

The uncertain economic environment could lead to precautionary saving, as consumers brace for potential price increases in the coming months. With the impact of tariffs expected to unfold throughout the year, households may become more cautious with their spending decisions.