US retail sales in May decreased by 0.9%, which was worse than the expected 0.7% drop. However, the control group, which better reflects consumer behavior, rose by 0.4%, compared to an expected increase of 0.3%. The previous control figure was adjusted from a 0.2% decline to a 0.1% decrease. Further details show that sales, excluding autos, fell by 0.3%, contrary to a predicted 0.1% increase. This figure was revised from a 0.1% increase to 0.0%. Sales excluding both autos and gas dipped by 0.1%, down from a previous 0.2% rise.

Category Specifics

In specific categories, sales in electronics and appliance stores dropped by 0.6%, in building materials by 2.7%, and in food and beverage stores by 0.7%. Food services and drinking places also declined by 0.9%, while clothing and accessories and sporting goods and hobbies each saw a rise of 0.8%. Restaurant sales experienced a significant downturn. Housing-related sectors, particularly building materials, showed decreased performance, with a 1.1% year-on-year fall, not adjusted for inflation. Prior to the report, year-end Fed pricing was at -49 basis points, which slightly adjusted to -48.5 afterward, with the FOMC meeting still in progress. These results paint a clearer picture: headline spending is weaker than expected, while core spending remains fairly strong. The gap between headline retail sales and the control group indicates that some sectors are struggling, but overall consumer activity remains relatively stable. The control group, which excludes more volatile items, is a better indicator for GDP, and its slight increase suggests demand isn’t significantly dropping. We observed a broad decline in discretionary spending categories. Electronics, building supplies, and food services all fell, signaling a potential dip in consumer confidence. This trend is notable, especially as restaurants—a segment that has thrived before—also reported declines. This suggests that even small luxuries are starting to feel the strain.

Market Reaction

On the other hand, purchases related to clothing and hobbies showed slight resilience. While these increases may not offset the overall slowdown, they complicate the narrative of widespread weakening consumption. This indicates shifting preferences rather than a complete pullback. Consumers might not be out of cash; they are just more selective in their spending. The reaction in the rates market remained calm and somewhat resilient. The shift from -49 to -48.5 basis points indicates that investors are not rushing to change their expectations for year-end rates. Despite softer headline data, the strength of the core likely supports this view. The market seems to interpret the report as mixed instead of firmly negative or prompting a major reassessment. In times of mixed data—where weakening top-line figures contrast with steady underlying strength—opportunities often arise. This situation suggests lower chances of abrupt policy changes, but still leaves room for volatility in interpretations. With this report coming during the mid-FOMC, the follow-up messaging from policymakers will carry extra significance. The data linked to housing now reveals subtle signals. The year-on-year drops in building materials, whether adjusted for inflation or not, suggest that residential activity is losing momentum. While it may not be in outright decline yet, the slowdown is noticeable. Past trends indicate that when housing stagnates or declines, it can influence broader consumer sentiment and impact long-term spending patterns. Rather than focusing solely on this headline miss or individual categories, it’s more useful to examine where activity is stable and where it is declining. Special attention should be paid to sectors reliant on job growth or real income increases. If these areas begin to falter, we can anticipate broader corrections. Overall, these figures highlight the need to consider both possibilities: a strong core or increasing softness. Therefore, volatility pricing may find a middle ground—favoring shorter timeframes and avoiding overextension in either direction until more clarity emerges. Create your live VT Markets account and start trading now.

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