Americans pulled back sharply on spending in July, sending U.S. retail sales down by the largest amount in more than a year. The unexpected decline came after months of stronger spending supported by government tax refunds, major sales events and World Cup activity. With inflation still putting pressure on household budgets and gasoline prices climbing again, economists are watching closely to see whether July marks the beginning of a broader slowdown in consumer spending.
July Brings an Unexpected Drop in Spending
U.S. retail sales fell 0.6% in July, the largest monthly decline since May 2025, according to Commerce Department data released Friday. The drop surprised economists, who had expected sales to increase slightly.
The decline followed a revised 0.2% increase in June and stronger spending earlier in the spring. Retail sales had received a boost in April and May as many Americans spent money from larger government tax refunds. Consumers also spent heavily around events such as the World Cup and Amazon Prime Day.
Now that some of those temporary boosts have faded, economists are trying to determine whether consumers are becoming more cautious.
The retail report also comes after weaker than expected employment figures, adding to concerns that economic growth could be losing momentum following strong consumer and business spending during the first half of the year.
Inflation and Gas Prices Squeeze Household Budgets
American families continue to face higher prices, making it harder for household income to stretch as far as it once did.
Consumer prices increased 3.4% in July compared with a year earlier, slightly lower than the 3.5% annual inflation rate recorded in June. Prices increased just 0.1% between June and July, marking the second consecutive month in which inflation declined.
However, inflation remains above the levels seen before the Iran war, and gasoline has become another growing expense for households.
Gas prices reached $4.08 per gallon in August, compared with $3.85 a month earlier and 92 cents more than consumers were paying at the same time last year. Gas station sales fell 0.9% in July, although fuel prices did not begin their latest climb until late in the month.
Consumer sentiment has also weakened. The University of Michigan’s latest consumer sentiment index showed Americans becoming more pessimistic about the economy, with persistent high prices likely contributing to those concerns.
Cars and Online Shopping Lead the Decline
Several major retail categories recorded weaker sales during July.
Sales at motor vehicle and parts dealers dropped 1.8%, reversing much of June’s 1.9% increase. Automaker promotions had helped drive the earlier increase.
Electronics and appliance store sales declined 0.5%, while online sales dropped 2.2%. Online shopping had received a major boost in June from Amazon’s four day Prime Day event, which began earlier than in previous years.
The weakness in online sales contributed to a 0.4% decline in the closely watched control group of retail sales, which excludes food services, automobiles, building materials and gasoline and is used in calculations of economic growth.
Heather Long, chief economist at Navy Federal Credit Union, said the numbers suggest households may be feeling increasingly strained.
“American consumers are showing signs of fatigue,” Long wrote Friday. “July retail sales were disappointing on all levels.”
Some Parts of Retail Continue to Grow
Despite the overall decline, July’s report was not weak across every part of the economy.
Clothing and accessories stores reported higher sales, as did furniture and home furnishing retailers. Building material and garden supply businesses also posted gains.
Restaurants offered another positive sign. Sales at restaurants increased 0.5% during the month, suggesting that consumers have not completely stopped spending on services. The retail report also does not capture major categories such as hotels and travel, meaning it provides only part of the picture of overall consumer activity.
Bernard Yaros, lead U.S. economist at Oxford Economics, cautioned against treating one weak report as proof that consumers are retreating.
“Though the latest numbers warrant a downgrade to the spending forecast, it’d be premature to write off the consumer,” Yaros said.
Many economists still expect the U.S. economy to grow at a solid pace during the July through September quarter, although some have lowered their forecasts following the latest retail figures.
Shoppers Hunt for Deals as Back to School Season Begins
The way Americans are spending may also be changing. Instead of abandoning purchases altogether, many consumers appear to be paying greater attention to promotions and discounts.
Off price retailers, electronics sellers and office supply stores have experienced a “strong early start” to the back to school shopping season, according to Elizabeth Lafontaine, director of research at Placer.ai.
“Consumers have looked to take advantage of early deals to check off their lists,” Lafontaine said.
Major retailers are responding by emphasizing value. Walmart, Target and other chains are promoting discounts as they compete for shoppers dealing with inflation. Target says 95% of its school supply prices are equal to or below their levels from last year.
World Cup activity also helped bring shoppers to stores during the summer. Stephen Yalof, CEO of outlet mall operator Tanger, said foot traffic increased during the festivities. He also said more Americans are taking vacations closer to home as they look for ways 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.
The Consumer Economy Faces Its Next Test
July’s retail decline has raised new questions about how long American consumers can continue supporting economic growth while dealing with inflation, expensive gasoline and tighter household budgets. The end of the tax refund boost may be revealing more of the financial pressure facing families, but continued spending at restaurants, clothing stores and other retailers suggests consumers have not disappeared. The coming months, including the crucial holiday shopping season, will offer a clearer picture of whether July was a temporary setback or the beginning of a more significant slowdown.
