U.S. Retail Sales Climb 0.9% in May, Exceeding Expectations

U.S. retail sales advanced by 0.9% in May, outperforming market expectations and suggesting ongoing consumer strength. This increase contributes to a 6.9% rise in retail sales compared to a year ago. Excluding the automotive sector, sales grew by 0.8% in May—or 0.9% with revisions to previous months—and have increased by 7.5% over the past year.

Key drivers of May's sales growth included gasoline stations, non-store retailers (online and mail-order businesses), and auto sales. Conversely, the restaurant and bar sector experienced the most significant decline. When excluding autos, building materials, and gasoline, a measure often considered indicative of underlying consumer demand, sales saw a 0.6% increase in May. If this trend holds steady in June, these "core" sales are projected to exhibit a 6.9% annualized growth rate in the second quarter compared to the first quarter average.

The nominal increase in sales was broad-based, with nine out of thirteen major sales categories showing gains. Sales, excluding those at gasoline pumps, rose a solid 0.7%. However, these figures are not adjusted for inflation, and once inflation is factored in, overall sales recorded a more modest 0.4% increase. Sales at non-store retailers were particularly strong, rising 1.5% in May—the fourth gain exceeding 1.0% in the last five months—and are up 12.2% over the past year, leading all core categories. In contrast, sales at restaurants and bars, the only component in this report offering a glimpse into services spending, declined by 0.1% in May, marking their first decrease in four months. This could signal that consumers are beginning to scale back discretionary spending due to increased outlays at the pump.

While nominal retail sales have expanded by 6.9% in the past year, inflation-adjusted, or "real," sales are up a more moderate 2.6% over the same period and remain below their April 2022 peak. The recent peace agreement between the U.S. and Iran is anticipated to potentially alleviate some consumer financial pressure through lower energy prices in the latter half of the year. The personal saving rate in April, at 2.6%, represented its lowest level since mid-2022, suggesting consumers may have limited capacity to sustain spending growth by further drawing down savings.

Key terms:

1. Core sales: A measure of retail sales that excludes volatile categories such as autos, building materials, and gasoline to provide a more stable indicator of underlying consumer spending trends.

2. Nominal sales: The total value of sales measured at current prices, without accounting for the effects of inflation.

3. Real sales: The total value of sales adjusted for inflation, providing a measure of the actual purchasing power and volume of goods sold over time.