WASHINGTON (Reuters) -U.S. retail sales dropped more than expected in May, weighed down by a decline in motor vehicle purchases as a rush to beat potential tariffs-related price hikes ebbed, but consumer spending remained supported by solid wage growth.
Retail sales fell 0.9% last month after a downwardly revised 0.1% dip in April, the Commerce Department’s Census Bureau said on Tuesday.
Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, decreasing 0.7% after a previously reported 0.1% gain in April.
Estimates ranged from a 1.7% drop to a 0.3% increase. Sales last month were also held down by lower receipts at service stations because of a decline in gasoline prices.
President Donald Trump’s sweeping tariffs have raised fears over global growth, restraining oil prices. But hostilities between Israel and Iran have boosted oil prices. Unseasonably cooler weather likely also hurt sales.
Federal Reserve officials prepared to start a two-day policy meeting on Tuesday. The U.S. central bank was expected to keep its benchmark overnight interest rate unchanged in the 4.25%-4.50% range while policymakers monitor the economic impact of tariffs and tensions in the Middle East.
A 25% duty on imported motor vehicles and trucks came into effect in April.
Retail sales excluding automobiles, gasoline, building materials and food services increased 0.4% in May after an upwardly revised 0.1% fall in April. These so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported to have dropped 0.2% in April.
Consumer spending, which accounts for more than two-thirds of the, economy slowed sharply in the first quarter, and could remain moderate in the April-June quarter.
The Atlanta Fed is currently forecasting GDP rebounding at a 3.8% annualized rate in the second quarter. The anticipated surge will largely reflect a reversal in imports, which have fallen sharply as the frontloading of goods fizzled. The economy contracted at a 0.2% pace in the January-March quarter.
Downside risks to consumer spending are rising. The labor market is slowing, student loan repayments have resumed for millions of Americans and household wealth has been eroded amid tariff-induced stock market volatility. The uncertain economic environment could lead to precautionary saving.
“Past experience suggests the biggest price rises will come in July, though the full impact of the tariffs likely will emerge across the whole of the remainder of the year,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
“That will weigh on growth in real incomes at the same time as a softening labor market will make people cautious with discretionary spending. Meanwhile, households no longer have ‘excess savings’ or strong growth in stock prices to spur them to spend.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
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