Source Credit : Portfolio Prints
U.S. Consumer Spending Remains Resilient, but Risks to Growth Are Mounting
U.S. retail sales rose more than expected in May as households increased spending on motor vehicles and absorbed higher gasoline prices. However, economists warn that consumer demand could weaken in the coming months as the temporary support from larger tax refunds fades.
The Commerce Department reported its fourth consecutive month of strong retail sales growth on Wednesday, reinforcing signs of economic resilience despite the oil price shock triggered by the U.S.-led conflict with Iran, which has intensified inflationary pressures.
At the same time, the Federal Reserve kept its benchmark interest rate unchanged at 3.50%-3.75%. However, updated quarterly projections indicate policymakers expect to raise borrowing costs later this year amid mounting concerns over inflation.
The central bank described economic activity as "expanding at a solid pace despite elevated uncertainty" stemming from tensions in the Middle East.
"Risks to consumer spending are tilted to the downside," said Gus Faucher, chief economist at PNC Financial. "Much of the recent strength has been supported by stock market gains, and any correction in technology stocks could prompt high-income households to cut back spending. A renewed escalation in the Middle East could also push energy prices higher, making the Fed more likely to raise rates rather than cut them this year."
Retail Sales Outperform Expectations
Retail sales jumped 0.9% in May, following a downwardly revised 0.4% increase in April, according to the Census Bureau. Economists surveyed by Reuters had expected a 0.5% increase.
Adjusted for inflation, retail sales rose an estimated 0.4% during the month.
On an annual basis, sales climbed 6.9% in May, highlighting a sharp contrast with consumer sentiment, which has deteriorated amid persistent inflation concerns. Some economists believe consumers viewed higher fuel prices as temporary, helping sustain spending momentum.
Gasoline Prices Drive Spending
Gasoline prices surged to four-year highs during the Middle East conflict before easing in recent days, with the national average falling below $4 per gallon for the first time since April.
The U.S. and Iran announced on Sunday that they had agreed on terms to end the conflict and reopen the Strait of Hormuz. However, President Donald Trump cautioned on Wednesday that the interim agreement was not final and said military action could resume if Tehran failed to comply.
Higher fuel prices boosted service station receipts by 3.4% in May after a 2.4% increase in April. Compared with a year earlier, sales at gas stations surged 26.5%.
Tax Refunds and Market Gains Have Supported Consumers
Larger tax refunds, combined with a strong stock market rally, have helped sustain consumer spending, though economists say this has increasingly come at the expense of household savings.
Consumer spending continues to be led by higher-income households, while rising fuel costs have disproportionately affected lower-income Americans.
Following the Fed's projections for potential rate hikes, Wall Street stocks fell, the U.S. dollar strengthened against a basket of currencies, and Treasury yields moved higher.
Data from Bank of America Institute showed no clear signs that households are relying heavily on borrowing to support spending. However, analysts noted that consumers appear to be making more frequent shopping trips, potentially in search of bargains.
Affordability Pressures Are Building
The end of tax season means much of the refund-related boost has now been exhausted. Meanwhile, inflation has outpaced wage growth for two consecutive months, and the personal saving rate fell to a four-year low in April.
A recent NerdWallet survey found that 35% of Americans expect to rely on credit this month to cover at least part of their expenses.
"Relying on credit to drive spending growth is not sustainable, either for households or for the broader economy," said Elizabeth Renter, senior economist at NerdWallet. "If consumers continue increasing spending while depending on credit cards under affordability pressures, debt levels could eventually become unmanageable."
Mixed Spending Patterns Across Sectors
Sales at auto dealerships rebounded 1.2% in May, while online retailers posted a 1.5% increase. Furniture stores recorded a 1.0% gain, and sales also rose at health and personal care stores, clothing retailers, and sporting goods, hobby, musical instrument, and book stores.
However, spending weakened in several categories.
Receipts at food services and drinking establishments—the report's only services category and a key indicator of household financial health—fell 0.1%. Sales at building material and garden supply stores remained flat, as did sales at grocery stores. Electronics and appliance stores saw sales decline by 0.5%.
Some economists view these softer categories as early evidence that consumers are becoming increasingly price sensitive.
Core Retail Sales Support Economic Growth Outlook
Core retail sales—which exclude automobiles, gasoline, building materials, and food services—rose 0.7% in May after increasing 0.5% in April. This measure closely aligns with the consumer spending component of GDP.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, now appears to be accelerating after slowing in the first quarter.
Separate Census Bureau data also showed a solid increase in business inventories during April, further supporting growth expectations.
The Atlanta Fed raised its estimate for second-quarter GDP growth to a 3.0% annualized pace from 2.8%, following growth of 1.6% in the first quarter.
"Inventory levels remain lean across many businesses, while depleted oil inventories resulting from the conflict with Iran will need to be replenished in the coming months," said Matthew Martin, senior U.S. economist at Oxford Economics. "That could make inventories a larger contributor to growth in the second half of the year. The key wildcard remains trade policy uncertainty."
