Retail Sales, Core Spending Miss in May, Raising Growth Risks Ahead of Fed Decision

Retail Sales Fall Sharply in May; Core Sales and Fed Outlook Weigh on Markets

U.S. retail and food services sales declined 0.9% in May 2025 to $715.4 billion, undershooting the forecast of a 0.5% drop. This marks the second straight monthly decline, with April’s data now revised to –0.1%. Although sales rose 3.3% compared to May 2024, the recent downturn points to a meaningful loss of momentum in household spending.

Core Retail Sales Disappoint, Undermining Consumption Outlook

Core retail sales—excluding autos, gasoline, building materials, and food services—fell 0.3% in May, a sharp miss from the expected 0.2% gain. This figure is closely watched as it feeds directly into GDP calculations. Combined with April’s weak 0.1% rise, the May print suggests softening in underlying demand, particularly across discretionary categories. These figures challenge the view that consumer spending is holding up and could weigh on expectations for Q2 economic growth.

Retail Trade Slides While Nonstore and Food Services Provide Support

Retail trade sales mirrored the headline figure, falling 0.9% in May. However, nonstore retailers—primarily e-commerce—rose 8.3% from a year earlier, while food services and drinking places gained 5.3%. These categories remain pockets of strength, supported by ongoing demand for convenience and leisure spending. Still, the decline in both total and core retail sales casts doubt on broader consumer resilience heading into the summer.

Fed Policy in Spotlight as Sales Miss Raises Growth Risks

This report arrives as the Federal Reserve begins its two-day meeting. Policymakers are expected to hold rates steady, with a 99.9% probability already priced in. However, the weak control group—reflected in the core retail sales—pressures the Fed’s growth outlook. With Q1 GDP already revised lower and consumer spending projected to slow from 3.1% to 1.1% by year-end, a sustained cooling in consumption could influence the tone of the Fed’s statement.

The Atlanta Fed’s model currently projects a 2.1% contraction in Q2 GDP. Today’s weaker-than-expected sales figures may further support that view, particularly if revisions remain negative.

Market Forecast: Bearish for Broad Retail, Fed Messaging May Increase Volatility

The downside surprise in both headline and core sales reinforces a bearish outlook on retail and consumer discretionary equities. Traditional retailers and physical-store chains are likely to face pressure, while nonstore and food service sectors offer selective strength. Traders should prepare for increased volatility across equities, bonds, and currencies as the Fed responds to declining consumer momentum.