EXTRA: Poor US retail sales a timing issue but outlook looks soft

(AWP Alliance News) - The moving of Amazon.com Inc's Prime Day and subdued consumer spending were cited as reasons behind an unexpected drop in US retail sales in July, providing further ammunition to those who believe the Federal Reserve should not increase interest rates.

According to data published by the US Census Bureau published Friday, advance monthly US retail and food services sales declined 0.6% on-month in July to USD763.6 billion from USD768.1 billion in June.

The fall followed 0.2% growth in June and was below FXStreet-cited consensus which forecast 0.1% growth in July.

On year, sales were 5.0% higher than in July 2025, but slowed from a 6.8% on-year rise in June.

Excluding sales at auto dealers and gasoline stations, sales dipped 0.2% on a month-on-month basis in July.

James Knightley, chief international economist, said the numbers were "very poor" and the weakest in over a year.

He noted the control group, which excludes volatile items such as autos, gasoline, building materials and eating out - and better tracks broader consumer trends - fell 0.4% versus expectations of a 0.3% gain.

"This is all the more surprising given the FIFA World Cup, which had lifted tourist numbers and the 250th Independence anniversary celebrations," he added.

Ksenia Bushmeneva, economist at TD Economics, noted much of the weakness stemmed from a sharp decline in non-store retail sales, down 2.2% on-month, reflecting lower sales at fuel dealers and the earlier timing of Amazon Prime Day, which took place in June this year rather than July.

Bushmeneva thinks the report suggests that consumer spending is transitioning from the weather- and tax-refund-driven rebound seen in the second quarter to a more moderate pace of growth in the third.

Barclays analyst Jonathan Miller noted that along with Prime Day, other promotional sales events, such as Target Circle Week and others, occurred earlier than usual this year, in June, pulling forward sales.

"We view the weakness as largely a timing effect rather than a sign of a faltering consumer, though spending growth still looks set to moderate in H2," he added.

The impact of rising energy prices on consumer spending was also noted.

Morgan Stanley said: "We had expected that the oil shock would likely begin to impact spending after around two quarters, and this softer data shows the deceleration that we were expecting to see."

Goldman Sachs said while the sequential weakness was likely exaggerated by the early Amazon Prime Day, it continues to expect consumer spending growth to slow from the solid pace of the first half of 2026, as the boost to consumer cashflow from larger-than-usual tax refunds that supported spending earlier this year fades and the headwind from higher energy prices remains.

Smoothing across the "Prime Day noise", Goldman estimates that the three-month annualised pace of real core retail sales growth fell to 1.1%. As a result, the broker lowered third quarter GDP tracking estimate by 0.5 percentage points to 2.2%, quarter-over-quarter annualised.

Citigroup analyst Andrew Hollenhorst expects the large drop in online sales in July will likely partially rebound in August and thinks markets are right to be cautious in reading too much into one month of volatile data.

But he cautioned that the slowdown in real income and job growth and the very low 2.7% savings rate suggest that consumer spending may slow further this year.

Economist Oliver Allen of Pantheon Macroeconomics agreed and suggested that there could be a sharper slowdown ahead.

"The lift to households' cash flows from tax refunds now is gone, higher energy prices will continue to put pressure on their finances, the underlying trend in income growth is weak, and the personal saving rate has little scope to fall further," he said.

Citigroup's Hollenhorst said Federal Reserve officials will be reluctant to read much into this one month of data especially given the potential for online sales to rebound.

"But the weaker-than-expected reading is another reason for Fed officials who wanted to hold rates steady in July to vote for the same outcome in September. We continue to see a hike at the September meeting - or at all this year - as unlikely."

The weak retail sales figures followed encouraging consumer and wholesale inflation prints, which have seen rate hike bets cool. The CME FedWatch tool now places a 69% chance on rates staying on gold at the September Federal Open Market Committee meeting compared to 56% a week ago.

Before that meeting, Fed officials will receive another inflation print, a jobs report, while the Jackson Hole Symposium also takes place.

By Jeremy Cutler, Alliance News reporter

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