Two of the most closely watched gauges of American household health buckled within hours of each other on Friday, delivering a warning on consumer spending just five days before a fresh wave of tariffs is due to hit shelves. The Commerce Department's advance retail sales report showed spending fell 0.6% in July, reversing forecasts for a modest gain, while the University of Michigan's preliminary consumer sentiment index for August sank to 51.0, an almost 8% one-month drop that erased two straight months of recovery.
Retail and food services sales totaled $763.6 billion in July, still up 5.0% from a year earlier but down from June - the first monthly decline since October and the sharpest since last spring. The "control group" figure that feeds directly into GDP calculations, which strips out autos, gasoline stations and building materials, slipped 0.4% after rising by the same amount in June. The weakness was broad: motor vehicle and parts dealers fell 1.8%, nonstore retailers (largely e-commerce) dropped 2.2%, and gasoline stations declined 0.9% on lower pump prices. Clothing stores and health and personal care retailers were rare bright spots, up 1.9% and 0.7% respectively. Economists flagged that some of the online-sales pullback likely reflected demand pulled forward into June, after Amazon moved its Prime Day event up from its usual July slot.
The sentiment reading landed the same morning and hit even harder. The University of Michigan Surveys of Consumers put its headline index at 51.0, down from 55.2 in July and well below the roughly 54.5 economists had forecast. The expectations sub-index fell to 50.6 from 55.4, and the current-conditions gauge slid to 51.8 from 54.8. Year-ahead inflation expectations ticked up to 4.3% from 4.2%, while the five-to-ten-year outlook held at 3.3% - both still well above pre-pandemic norms.
A confidence gap widened by tariffs and geopolitics
Survey director Joanne Hsu attributed the slide less to households' own finances than to their view of the wider economy. Short-run expectations for business conditions sank 11% in the month, and long-run expectations dropped 17%, she noted, with the erosion concentrated among lower-income, older and non-college-educated consumers who are most exposed to any further loss of purchasing power from inflation.
"Sentiment among Republicans is now 19% below readings just prior to the Iran conflict and the lowest since the 2024 election."
Joanne Hsu, Director, University of Michigan Surveys of Consumers
The timing amplifies the significance of both readings. Beginning August 19, an additional 50% tariff takes effect on a broad swath of Canadian imports - dairy, alcoholic beverages and motor vehicles headline three presidential proclamations issued under Section 338 of the Tariff Act, but the underlying schedules also cover furniture, cement, plywood and dozens of other categories, with no exemption for goods that qualify under the US-Mexico-Canada trade pact. Layered atop July's Section 301 tariffs on textiles and other goods from 60 economies, the cumulative duties give households one more reason to brace for higher prices even as this week's data suggests many are already pulling back.
Markets read the double miss as a signal that the Federal Reserve has more room to cut rates next month than a hawkish surprise would have allowed. Treasury yields eased and the dollar softened following the releases, and futures pricing tied to the Fed's September meeting moved further in favor of a quarter-point cut, traders said, as the combination of slowing spending and softening confidence outweighed the tick-up in inflation expectations in the policy debate. Retailers themselves were split on the market's reaction Friday: shares of discount and value chains that tend to benefit when shoppers trade down held up better than department stores and specialty retailers exposed to discretionary categories.
What to watch next
The next major test comes fast. The Section 338 tariffs take effect Thursday, and Canadian Prime Minister Mark Carney has said Ottawa is weighing a "full range" of retaliatory options, though he has held off announcing specific targets while trade talks continue. On the data front, the University of Michigan's final August reading and revisions to July retail sales are due in the coming weeks, and a run of back-to-school and early holiday-season commentary from major retailers - several of which report earnings this week - should offer the clearest read yet on whether Friday's soft numbers mark a blip or the start of a more durable pullback in consumer spending heading into the Fed's September 16-17 policy meeting.
