US consumer spending exhibited signs of strain in July, with retail sales falling unexpectedly and overall spending flattening when adjusted for inflation. According to Commerce Department data, retail sales dropped by 0.6% in July, marking the largest decrease since May 2025, contrary to economists' projections for a slight increase. This slowdown followed a period of increased spending in April and May, fueled by government tax refunds.
When adjusted for inflation, consumer spending was flat in July compared to a 0.4% gain in June, as reported by the Commerce Department. However, when not adjusted for inflation, spending did rise by 0.2% from June, driven primarily by increases in services such as financial services, insurance, healthcare, housing, and utilities. Discretionary purchases generally declined during this period.
The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, rose by 0.2% from June, keeping the annual inflation rate at 3.7%. Despite the spending pullback, household savings improved, with the saving rate increasing to 3% in July from a four-year low of 2.6% in June. This suggests consumers are becoming more cautious and are less willing to draw down their savings.
Economists are expressing concern about the resilience of consumers, who have been a primary driver of economic growth despite persistent inflation and rising fuel prices. Beef sales, for instance, fell in the 13 weeks leading up to mid-July as consumers either ate out less or opted for cheaper protein alternatives. Goldman Sachs analysts anticipate consumer spending to grow by only 1-1.5% in the second half of the year, indicating a significant slowdown. This caution is further reflected in declining consumer sentiment, which fell by approximately 8% early in the month to a preliminary reading of 51, ending a two-month streak of rising sentiment. Heather Long, chief economist at Navy Federal Credit Union, commented that "American consumers are showing signs of fatigue."
High fuel prices, which have been rising since late July and reached $4.08 per gallon overnight, along with grocery prices that are about 33% higher than seven years ago, are contributing to consumer fatigue. Grocery unit sales were down 1.8% in June compared to the previous year. Housing costs also remain a significant burden, with 30-year mortgage rates near 6.5% and home prices close to record highs, effectively pricing out first-time buyers. The personal savings rate, which fell to 2.7% in June, is well below the 2014-2019 average of 5.5%, indicating that households are managing financial pressures by trading down to private labels, discount grocers, and reducing their weekly purchases.
