In a sign that consumer demand may be fraying around the edges, U.S. retail spending slowed sharply in April to just 0.1% after a surge of 1.7% in March. Shoppers had rushed to make purchases ahead of President Donald Trump’s stiff tariffs, but now the pace has slowed.
April Retail Sales Miss Expectations
The April data came in worse than the 0.2% monthly increase economists polled by FactSet had predicted. Among the biggest declines was in motor vehicle and parts sales, which dropped to -0.1% in April from 5.5% in March, signaling a cooling in consumer enthusiasm.
Consumer Spending’s Impact on GDP
Consumer spending is a critical driver of the economy, accounting for about two-thirds of GDP. The steep drop in retail sales could lead to another quarter of disappointing GDP growth, after the contraction seen in the previous quarter.
Economists from EY pointed out that the “pre-tariff shopping spree is over,” marking a shift in consumer behavior as the effects of tariffs begin to take hold.
The Toll of Tariffs on Consumer Sentiment
The Trump administration’s series of tariff hikes in recent months has contributed to deteriorating consumer sentiment, as shown in various surveys. Both Wall Street and the Federal Reserve are watching for signs of consumers pulling back amid rising uncertainty in the economy.
Shift in Consumer Behavior
The data from April shows that consumer spending has clearly slowed from the brisk pace of late 2024. Chris Rupkey, chief economist at FwdBonds, stated, “Whatever strength we saw in the economy in the first quarter, I think it’s a bit of a mirage,” adding that sales were driven forward to avoid higher prices due to the trade war.
Bright Spots and Potential Upsides
Despite the overall slowdown, one bright spot in the report was spending at bars and restaurants, which increased by 1.2% from March. Spending at grocery stores remained unchanged from March, which Jefferies economists saw as a potentially positive sign for the U.S. economy.
However, Jefferies also pointed out that spending less at restaurants and more on groceries would be a logical response to weaker consumer confidence and rising concerns over employment prospects. Currently, this is not the trend, showing a contrast to consumer sentiment data.
Spending Declines in Other Sectors
Spending on health and personal care, apparel, and sporting goods all saw declines in April. This shift suggests that while consumers are still spending in some areas, they are being more cautious in others.
Outlook for the Rest of the Year
Despite the sharp drop in retail spending, Morgan Stanley economists remained optimistic, noting that the consumer remains in a solid starting position. However, they also expect a slowdown, with price increases from tariffs likely to weigh on purchasing power in the latter half of the year.
Overall, the April retail sales report suggests that while there was a temporary surge in consumer activity earlier in the year, the impact of tariffs may be starting to take hold, leading to a more cautious consumer environment.
