May Retail Sales Miss Raises Eyebrows, but Tariff Pull-Forward and Fed Context Soften the Blow

U.S. consumers hit the brakes in May, dialing back spending across a wide swath of retail categories, leading to a sharper-than-expected 0.9% month-over-month drop in headline retail sales. The decline, steeper than consensus expectations of -0.7%, marks the largest monthly contraction since March 2024. However, economists and Federal Reserve watchers were quick to tamp down alarmist takes, citing a pair of mitigating factors: tough year-ago comparisons and a likely pull-forward of demand into April in anticipation of tariff-related price hikes.

Underneath the headline figure, the weakness was broad but unsurprising. Sales at motor vehicle and parts dealers plunged 3.5% on the month, dragging the category into the red for the second straight month and reflecting a sharp -3.9% drop in autos. Gasoline station sales also fell by 2.0%, driven in part by lower prices at the pump, and food services and drinking places showed a rare soft print. When stripping out these volatile components—autos, gas, food services, and building materials—the so-called "control group" rose a modest 0.4%. That core strength offers some comfort, suggesting that real consumption, while decelerating, has not fallen off a cliff.

Year-over-year comparisons also paint a mixed but more encouraging picture. Nonstore retailers—largely e-commerce—grew 8.3% YoY, while furniture and home furnishings surged 8.8%. Health and personal care stores posted a 7.7% increase, hinting at underlying resilience in discretionary and wellness-related categories. On the flip side, gasoline station sales declined nearly 7% YoY, reflecting a combination of weaker demand and easing energy prices.

One of the more significant drags on May’s print was the revision dynamic at play. April’s headline figure, originally reported as +0.1%, was revised down to -0.1%, making May’s decline even more stark in contrast. Still, the pullback is being framed by many on Wall Street as a breather after an artificially inflated April. With tariffs on a wide range of imported goods looming, consumers likely front-loaded purchases into the prior month, especially for big-ticket items and durable goods.

That narrative helps explain why Federal Reserve officials are unlikely to be rattled by the May report as they kick off their two-day policy meeting. The Fed’s preferred inflation gauges remain well-behaved, and the soft spending data may even give doves some talking points as the central bank weighs its options heading into the second half of the year. Market pricing currently anticipates roughly 48 basis points of cuts by year-end, and this report doesn’t move that needle much.

Table 2 of the Census Bureau report highlighted some of the biggest monthly movers. Aside from the steep drop in vehicles and gas, categories showing strength included miscellaneous store retailers (+2.9% MoM), furniture and home furnishings (+1.2%), and sporting goods, hobby, music, and books (+1.3%). These gains are often volatile and could be revised, but they hint at pockets of consumer activity outside the usual suspects.

Meanwhile, Table 3’s coefficient of variation—used to assess estimate reliability—suggests investors should be cautious when interpreting some of the larger swings. Categories like miscellaneous retailers (4.5% CV) and health & personal care stores (3.8% CV) show higher sampling error, while general merchandise and food & beverage stores remained more stable and statistically robust.

One retail bellwether under scrutiny is Walmart (WMT), which has now posted nine consecutive days of stock price declines. Already under pressure from margin concerns and valuation compression, Walmart could see additional headwinds in the wake of today’s retail sales print. While the company’s broad exposure and pricing power often buffer it from short-term category swings, investor sentiment may turn more cautious if consumer spending doesn’t stabilize over the summer.

Looking at the broader data set, retail sales excluding autos were down 0.3% (vs. +0.1% expected), and excluding both autos and gasoline, sales dipped 0.1%. Sales excluding autos, gas, building materials, and food services—the control group—rose 0.4%, in line with expectations and a rare bright spot in an otherwise weak print. That suggests underlying consumption is not collapsing, even if the headline print spooked some traders.

Also worth noting were the May import and export prices, which came in cooler than expected. Import prices were unchanged on the month, while export prices fell 0.9%, adding to a disinflationary tone across trade. Non-petroleum import prices rose modestly (+0.2%), while petroleum import prices dropped sharply (-3.7%). These figures, in conjunction with soft retail spending, suggest the Fed will have room to remain patient.

In short, while the May retail sales report wasn’t pretty, it’s also not a reason to panic. A soft print, yes—but with asterisks. Consumer fatigue is evident, but so is tactical spending behavior in the face of shifting price dynamics. For now, the Fed stays the course, investors recalibrate expectations, and retailers like Walmart brace for what could be a choppy summer ahead.

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