Americans Just Stopped Spending, and Nobody Saw It Coming

Keypoints:

• • US retail sales dropped 0.6% in July, the steepest fall since May 2025
  • Economists had forecast a small increase instead
  • The decline followed a spending boost in April and May fueled by tax refunds, which has now faded
  • Online sales fell 2.2%, and vehicle sales fell 1.8%
  • Consumer sentiment separately fell about 8% in early August, ending two months of improvement
  • Gasoline prices ticked back up amid tension in the Strait of Hormuz

Retail sales dropped 0.6% in July, the steepest fall in over a year. Economists had actually predicted a small increase instead. The gap between expectation and reality is what makes this report worth a closer look.

The Commerce Department put retail and food services sales at $763.6 billion for July, down from a revised 0.2% gain in June. Much of the earlier strength in April and May came from Americans spending their tax refunds. That boost has now worn off completely, leaving spending to stand on its own for the first time in months.

The details show where the pullback hit hardest. Vehicle sales fell 1.8%, reversing June's gain, which had been driven by manufacturer promotions. Online sales fell 2.2%, though part of that drop reflects a tough comparison against Amazon's Prime Day event, pulled forward into late June this year.

The mood data tells a similar story. Consumer sentiment fell about 8% in early August, according to the University of Michigan's survey, snapping two straight months of improvement. Expected business conditions sank especially hard, down 11% for the short run and 17% for the long run, as gas prices ticked back up amid tension in the Strait of Hormuz.

Not every economist reads this as the start of a slowdown. Some point to rising household wealth from stock market gains as a real cushion for spending. But the gap between wealthier households riding that wealth effect and everyone else feeling squeezed by prices is becoming harder to ignore, and it's exactly the kind of split the Fed will be watching as it weighs its next move on rates.