Core retail sales fell 0.4% in July, defying economists' expectations of a 0.3% gain and signaling potential cracks in the consumer spending that's powered the economy through months of elevated inflation. The Commerce Department released the data Friday, revealing the sharpest overall retail decline since May 2025.
Retail sales overall dropped 0.6% last month after a revised gain of just 0.2% in June, which itself was marked down from earlier estimates. The decline came after Americans had dipped into government tax refunds to fuel spending bumps in April and May, raising questions about what happens when those fiscal injections fade.
Core retail sales, which exclude autos, gasoline, building materials and food services, provide the clearest window into underlying consumer behavior. The measure's weakness wasn't an isolated data point. It followed unexpectedly sluggish jobs figures last week, together suggesting the economy could be slowing after strong consumer and business spending in the first half of the year.
Consumer Fatigue Sets In
Heather Long, chief economist at Navy Federal Credit Union, didn't mince words. "American consumers are showing signs of fatigue," she wrote, adding that "July retail sales were disappointing on all levels."
The weakness spread across categories. Business at motor vehicle and parts dealers fell 1.8% after a 1.9% increase in June, when automakers' promotion incentives had temporarily boosted sales. Electronics and appliance sales declined 0.5%. Online sales fell 2.2% from June, when they'd been fueled by spending around Amazon's four-day Prime Day event that began in late June, earlier than previous years.
That drop in online sales weighed heavily on the control group—which excludes food services, autos, building materials and gas station sales and is used to calculate economic growth. That figure fell 0.4% last month. Excluding sales at gas stations and auto dealers, retail sales in July fell 0.2%.
Bernard Yaros, lead U.S. economist at Oxford Economics, urged caution before declaring the consumer dead. "Though the latest numbers warrant a downgrade to the spending forecast, it'd be premature to write off the consumer," he said. The job market is "broadly balanced," and wealthy households, boosted by strong gains in the stock market, continue to spend.
Energy Costs Bite Again
Prices in July weren't adjusted for inflation and were affected by falling sales at gas stations. Business at gas stations fell 0.9% last month. Gas prices had remained low until later in the month when evidence of a stalemate between the U.S. and Iran in the Strait of Hormuz began to grow.
Gas prices have been rising since the final week of July and ticked higher again overnight to $4.08 per gallon, up from $3.85 a month ago, according to AAA. That's 92 cents more per gallon than Americans were paying last year at this time. AAA said this week that the high cost of fuel for Americans this late in the year is unprecedented.
Separately, consumers turned more pessimistic about the economy this month, likely driven by stubbornly high prices, according to the University of Michigan's consumer sentiment index released Friday.
Retailers Push Discounts
Among the bright spots, clothing and accessories stores, furniture and home furnishing stores, and building material and garden supplies merchants all posted gains. The report doesn't include travel and hotel stays, but restaurants, the lone services category, rose 0.5%.
Elizabeth Lafontaine, director of research at Placer.ai, said off-price retailers, consumer electronics and office supply retailers had a "strong early start" to the back-to-school season. "Consumers have looked to take advantage of early deals to check off their lists," Lafontaine said.
Walmart, Target and other retailers have been pushing discounts for the fall season. Target said 95% of prices for school supplies are at or below last year's levels.
Stephen Yalof, CEO of the outlet mall operator Tanger, said foot traffic increased this summer because of World Cup festivities and because more people were vacationing close to home to save money. "We're rewarding with value, and we're getting customers to come in … and shop more frequently," Yalof told The Associated Press.
Why This Matters:
The retail sales miss reveals what happens when government stimulus fades and households face the real cost of sustained inflation. After spending tax refunds in April and May, consumers pulled back sharply in July, suggesting the economy's growth depends more on fiscal injections than organic demand. The control group's 0.4% decline directly feeds into GDP calculations, threatening the strong growth narrative that's dominated the first half of the year. With gas prices hitting unprecedented levels for this time of year and geopolitical tensions in the Strait of Hormuz threatening further energy cost increases, household budgets face continued pressure. The divergence between wealthy households buoyed by stock market gains and the broader consumer base shows an economy increasingly dependent on asset price inflation rather than broadly shared prosperity. Retailers' aggressive discounting suggests they're bracing for a difficult fall season.