U.S. retail sales fell in July for the first time in nine months as the boost from big tax refunds faded, suggesting that consumer spending was slowing down and prompting economists to slash their economic growth estimates for the third quarter.
Spending weakened more than expected in Jul-26, with retail sales falling by -0.6%mom (Jun-26: +0.2%mom), significantly below market consensus for a +0.1%mom increase and marking the first monthly decline in 9 months. Nevertheless, sales were still +5.0%yoy higher than a year ago, albeit moderating from +6.7%yoy in Jun-26. Weakness was partly attributable to the fading boost from tax refunds, alongside lower spending on automotive (-1.8%mom), online sales (-2.2%mom) and gasoline-station sales (-0.9%mom). On another note, sales excluding autos, gasoline, building materials and food services contracted by -0.4%mom (Jun-26: +0.4%mom), against expectations for a +0.3%mom gain, suggesting a clearer moderation in underlying consumer spending.
In another release, the US consumer sentiment deteriorated in Aug-26 as concerns over purchasing power persisted. The preliminary University of Michigan Consumer Sentiment Index fell to 51.0 (Jul-26: 55.2), below 54.5 predicted by the market expectations and ending two months of improvement. Both current conditions (51.8; Jul-26: 54.8) and consumer expectations (50.6; Jul-26: 55.4) weakened, with particularly sharp deterioration in expected business conditions. High prices and concerns over real purchasing power remained major headwinds, especially among lower-income and older households, while only 8% of respondents expected income growth to outpace inflation over the next year. One-year inflation expectations edged higher to +4.3% (Jul-26: +4.2%), although long-term inflation expectations remained unchanged at +3.3% for the third month. This suggests longer-term expectations remain relatively anchored despite elevated near-term price concerns.
Both data releases strengthen the case for the Fed to remain on hold in the near term rather than rush into another rate hike. Markets now place around a 69% probability on the Fed maintaining the fed funds rate at 3.50-3.75% in Sep-26. Nevertheless, a rate hike later in 2026 has not been fully ruled out as inflation remains above the Fed’s target; supporting likelihood of policy tightening by year-end should inflation pressures re-accelerate and remain elevated.
