A Strong Consumer Hiding Beneath the Weak Retail Sales Headline
Retail sales fell in May, but beneath the surface, the picture of the American consumer remains solid—and in many categories, unexpectedly strong. Investors and analysts focused solely on the headline decline are in danger of missing what’s really happening: a consumer economy that is growing in real terms, even as interest rates remain elevated and tariff policy shifts.
The Commerce Department reported a 0.9 percent drop in retail and food services sales last month, following a downwardly revised 0.1 percent decline in April. At face value, that might suggest a slowdown. But it would be a mistake to view this as a turn in trend. The core measure of retail spending—the “control group” that feeds directly into GDP—rose 0.4 percent, defying expectations.
Much of May’s decline can be traced to falling gas prices and tariff-driven front-loading earlier in the spring. Auto sales, which surged in March and April as consumers rushed to buy ahead of expected tariff hikes, pulled back sharply in May. Sales at gas stations also declined, but that reflected lower prices, not weaker demand. According to the latest CPI report, gasoline prices dropped 3.0 percent in May—one of the biggest single-month declines in years. That’s good news for households, not a sign of distress.
Strong Growth Where It Counts
To get a clearer sense of the real economy, we adjusted year-to-date retail sales figures through May for inflation using category-specific CPI data. Since the start of the year—roughly coinciding with President Trump’s second term—real growth is evident across almost every major segment:
- Motor vehicles and parts: +5.9% real growth
- Furniture and home furnishings: +6.4% real growth
- Clothing and accessories: +4.8% real growth
- Nonstore (online) retailers: +4.7% real growth
- General merchandise: +1.9% real growth
- Gasoline stations: +3.0% real growth, despite price deflation
- Restaurants and bars: +1.9% real growth, even with 4.2% inflation in food away from home
Only two major categories—electronics and building materials—are showing negative real growth so far this year.
Taken as a whole, inflation-adjusted retail and food services sales are up 1.8 percent year-to-date. That’s meaningful real growth in a high-rate, post-stimulus environment—and a sign that consumer demand is holding firm even as policy shifts toward investment, production, and rebalancing trade.
A Cautionary Note on Restaurants
Still, not all of May’s details were encouraging. One notable soft spot was a 0.9 percent monthly decline in sales at restaurants and bars—the largest drop in over two years. Because dining out is a highly discretionary activity, it can be a sensitive indicator of consumer sentiment. Unlike autos, there’s no obvious frontrunning or seasonal distortion to explain the pullback. While the category remains up 6.1 percent year-to-date nominally—and 1.9 percent in real terms—it’s a signal worth watching. It may reflect early signs of consumer caution, especially in higher-income discretionary spending.
Inflation Falls, Real Spending Rises
The combination of falling inflation and steady wage gains continues to support real disposable income. In May, headline CPI rose just 0.1 percent, and core inflation excluding food and energy ticked up a modest 0.2 percent. Over the first five months of 2025, prices have risen at an annualized pace of just 2.3 percent—a clear sign that tariff increases have not fed through into general price levels.
In this environment, real spending is what matters most. Month-to-month volatility in nominal figures, especially in categories like gas and autos, can easily distort the big picture. But the sustained growth in real core sales, particularly in discretionary categories like apparel, home goods, and dining, suggests the consumer sector is more resilient than many believe.
If analysts continue to underweight real year-to-date gains, they risk misreading the trajectory of the U.S. economy. Investors betting on a consumer slowdown may find themselves surprised as second-quarter GDP numbers come in stronger than expected. Meanwhile, the Federal Reserve—widely expected to hold rates steady this week—will be watching closely to see whether real spending continues to outperform expectations.
Markets and policymakers alike should consider that the current economic mix—disinflation, strong real consumption, and a reassertion of trade leverage—is not just sustainable, but potentially stabilizing.
What looks like a slowdown at first glance may, in fact, be mere tariff and policy-induced volatility and recalibration. And behind that adjustment, the American consumer is still moving forward.
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