BY MIRABEL ODETA
U.S. retail sales rose more than expected in May as American households increased spending on vehicles, online purchases, and other goods, showing continued strength in consumer activity despite higher prices and economic uncertainty.
The stronger-than-forecast report from the Commerce Department highlighted the resilience of the U.S. economy, with retail sales increasing for the fourth consecutive month. The data came alongside signs of improved job growth, suggesting that consumer demand has remained steady despite challenges from rising costs and the impact of the U.S.-led conflict with Iran on energy markets.
However, economists warned that the recent strength in spending may slow in the coming months as temporary boosts from larger tax refunds fade and households face continued pressure from elevated prices.
The strong retail figures, combined with persistent inflation, have increased expectations that the Federal Reserve may keep interest rates higher for longer. While some economists said a future rate increase remains possible, they noted that the recent decline in oil prices reduces the urgency for the central bank to tighten policy further.
The Federal Reserve was expected to maintain its benchmark interest rate in the 3.50% to 3.75% range while moving away from language suggesting an immediate preference toward rate cuts.
“The strength of May’s retail sales report and the acceleration from April’s spending pace will raise more concerns at the Fed as it tries to control consumer inflation pressures,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
According to the Commerce Department’s Census Bureau, retail sales increased 0.9% in May after a revised 0.4% increase in April. Economists had expected a smaller gain of 0.5%.
Compared with a year earlier, retail sales were up 6.9% in May, showing continued consumer demand even as inflation affected household budgets.
Some of the increase was linked to higher gasoline prices. Sales at service stations rose 3.4% in May after increasing 2.4% in April, with year-over-year service station sales climbing 26.5%.
Gasoline prices had surged to their highest levels in several years due to tensions in the Middle East, though prices have since declined. The national average price for gasoline recently fell below $4 per gallon for the first time since April.
The United States and Iran later reached an agreement on terms aimed at ending the conflict and reopening the Strait of Hormuz, helping ease concerns about continued disruptions in global energy markets.
When adjusted for inflation, economists estimated that retail sales still increased 0.4%, suggesting that underlying consumer demand remained positive even after accounting for higher prices.
Tax refunds and gains in the stock market have supported household spending in recent months, though some analysts noted that consumers have relied more heavily on available income rather than increasing savings.
Consumers Continue Searching for Value
Bank of America Institute said its analysis of internal data showed that overall consumer financial conditions remained stable, with no clear evidence that households were relying heavily on borrowing to maintain spending.
However, the analysis also suggested that some shoppers were making more frequent store visits, possibly as they searched for lower prices and better deals.
Several major retail categories posted gains in May. Auto dealership sales recovered by 1.2%, while non-store retailers, including online businesses, saw sales rise 1.5%.
Furniture stores recorded a 1% increase, and spending also improved at health and personal care stores, clothing retailers, and businesses selling sporting goods, hobbies, musical instruments, and books.
Not all categories performed strongly. Sales at restaurants and drinking establishments, the only services category included in the report, declined 0.1%. This measure is closely watched because it reflects household confidence and discretionary spending.
Sales at building material and garden equipment stores were unchanged, while food and beverage store sales also remained flat. Electronics and appliance store receipts declined 0.5%.
A key measure of underlying consumer demand — retail sales excluding automobiles, gasoline, building materials, and food services — increased 0.7% in May after rising 0.5% in April.
Economists often use this measure as an indicator of the consumer spending component of gross domestic product because it removes categories that can create larger monthly swings.
Despite the positive results, analysts cautioned that the pace of spending growth may not continue. The tax filing season has ended, and many households have already used a significant portion of their refunds.
At the same time, inflation has recently grown faster than wage gains, while the personal savings rate fell to its lowest level in four years in April.
“Consumption regained some momentum during the spring, but the boost from unusually large tax refunds is likely to fade,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
For now, consumer spending appears to be recovering after slowing during the first quarter. Since household spending accounts for more than two-thirds of U.S. economic activity, continued consumer strength remains an important factor in determining the country’s growth outlook.
The Atlanta Federal Reserve’s economic tracker estimated that the U.S. economy was expanding at an annualized rate of 2.8% in the second quarter, compared with 1.6% growth in the previous quarter.
The latest retail data suggests the economy continues to show resilience, but future growth will depend on whether households can maintain spending momentum as financial support from refunds fades and inflation remains a challenge.
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