US Retail Sales Fell 0.6% in July, Sharpest Drop Since May 2025

US consumer spending cooled notably in July, as retail and food services sales declined 0.6% from the prior month to $763.6 billion, Commerce Department data released Friday showed. The result marked the steepest monthly drop since May 2025 and undershot market expectations for a 0.1% increase. June sales were revised down to a 0.2% gain. Weakness was broad-based across major categories. Nonstore retailers, including e-commerce, posted a 2.2% decline. Motor vehicle and parts dealers fell 1.8%. Gasoline station sales slipped 0.9%, reflecting softer volumes and fuel price dynamics. Electronics and appliance stores edged down 0.5%. Clothing stores were a bright spot, rising 1.9%. The "control group" measure used to gauge the portion of retail activity that feeds into GDP—excluding autos, building materials and gasoline—fell 0.4%, the largest decline in that metric since early 2025. Economists point to fading support from earlier 2026 cash inflows tied to larger-than-usual tax refunds associated with the 2026 tax cuts. Those refunds boosted spending through the first quarter and into early summer, but that impulse has dissipated as refund season ended. On a year-over-year basis, sales still looked solid: retail sales were up 5.0% from July 2025, and the three-month period through July implied 6.3% annualized growth. For the Federal Reserve and markets, the control-group drop is closely watched given consumer spending represents roughly two-thirds of US economic output. The July reading points to a softer trajectory for third-quarter growth than the pace seen in the first half. One offset could come from the wealth effect, as elevated equity portfolios—especially among higher-income households—may continue to support spending even as broader sentiment cools.