US Retail Sales Drop 0.6% in July as Consumers Cut Spending

Americans unexpectedly cut their spending in July, ending a solid demand run and pushing retail purchases down by the most in more than a year. The 0.6% slide reported by the Commerce Department follows a revised 0.2% gain in June. Economists attribute part of the summer pullback to a fading boost from government tax refunds that had driven a notable bump in spending through April and May. That effect may have faded last month.

The slowdown hit several major sectors hard. Sales at motor vehicle and parts dealers dropped 1.8% in July after climbing 1.9% in June, when purchases were aided by automakers’ promotional incentives. Online sales fell 2.2% from June, when they were fueled by Amazon’s four-day Prime Day event that began in late June, earlier than previous years. Electronics and appliance sales declined 0.5%.

Gas Price Stagnation and Cost Pressures Collide With Retail Fatigue

Even when excluding autos and gasoline, retail sales fell 0.2% according to the Census Bureau. At the same time, consumers faced renewed energy costs. Gas prices bounced back in recent weeks in what appears to be a stalemate in the Strait of Hormuz, with motor club AAA tracking prices ticking higher overnight to $4.08 per gallon, up from $3.85 a month ago. It is 92 cents more per gallon than Americans were paying last year at this time.

It’s not lights out for the economy, but new risks are emerging if the consumer pulls their support for economic growth, said Christopher S. Rupkey, at the financial research firm fwdbonds. The data offers only a snapshot of consumer spending and doesn’t include activities like travel and hotel stays. While broader U.S. inflation declined slightly in July as gas and grocery prices slipped, inflation is still rising more quickly than before the Iran war. Consumer prices increased 3.4% in July from a year ago, down slightly from 3.5% in June, the Labor Department said Wednesday. Inflation had fallen to 2.4% before the Iran war. On a monthly basis, prices rose just 0.1% from June to July. The modest decline marked the second straight decrease after sharply higher gas prices pushed inflation to 4.2% in May, a three-year high. Yet even with that respite, prices are still rising more quickly than average wages, underscoring the challenges many Americans have had paying for groceries, gas, and healthcare. And some costs continued to climb last month, including airfares, computers, and used cars.

Back-to-School Shopping Shifts as Inflation-Weary Families Seek Out Value

Given such a tough environment, economists are closely watching how families spend during the back-to-school shopping season, the second largest shopping period for retailers after the winter holidays. Shopping has been steady, though Americans have dialed in on sales as they grow more cost-conscious. Retailers begin reporting quarterly earnings next week.

Off-price retailers, consumer electronics and office supply retailers have had a strong early start to the back-to-school season, said Elizabeth Lafontaine, director of research at Placer.ai. “Consumers have looked to take advantage of early deals to check off their lists,” Lafontaine said. Walmart, Target and other retailers have been pushing discounts for the fall season, seeking to lure inflation-weary shoppers. Target, for example, says that 95% of prices for school supplies are at or below last year’s levels.

The squeeze on traditional retail goods contrasted with the lone services category tracked in the federal data: restaurants registered a 0.5% increase in July. Stephen Yalof, CEO of the outlet mall operator Tanger, noted an increase in foot traffic this summer because of the World Cup festivities. More Americans were shopping too, Yalof said, because more people are vacationing close to home to save money.