US retail sales drop 0.6% in July, biggest monthly decline since May 2025

American consumers hit the brakes in July. Retail and food services sales fell 0.6% month-over-month to $763.6 billion, according to Commerce Department data released Friday. That’s the steepest monthly decline since May 2025, and it caught Wall Street off guard: economists had expected a modest 0.1% increase.

June’s numbers were revised to show just a 0.2% gain.

Where the weakness showed up

The damage was spread across several major categories. Nonstore retailers, which includes e-commerce, led the retreat with a 2.2% drop. Motor vehicle and parts dealers fell 1.8%. Gasoline stations declined 0.9%, reflecting both lower volumes and shifting fuel prices. Electronics and appliance stores slipped 0.5%.

Clothing stores posted a 1.9% gain. The control group, a measure that strips out autos, building materials, and gas to get closer to what actually feeds into GDP calculations, dropped 0.4%. That’s the most significant decline in that metric since early 2025.

The tax refund sugar rush is over

Earlier in 2026, consumers were flush with cash from larger-than-usual tax refunds tied to the 2026 tax cuts. That extra money juiced spending through the first quarter and into early summer. With refund season well in the rearview mirror, the spending impulse faded.

The year-over-year picture still looks respectable on the surface. Retail sales were up 5.0% compared to July 2025, and the three-month period ending in July showed 6.3% annualized growth.

What it means for the Fed and markets

Consumer spending accounts for roughly two-thirds of US economic output. The control group decline of 0.4% is particularly relevant for GDP forecasting, suggesting the third quarter may not deliver the kind of growth that the first half of the year produced.

One factor that may prevent a sharper downturn: the wealth effect from equity markets. Stock portfolios, particularly those held by higher-income households, have remained elevated, providing a floor under spending for top income brackets even when broader consumer sentiment softens.

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