US Retail Sales Exceed Expectations in May

• Core retail sales (excluding autos, gas, building materials, and food services) increased 0.7% in May, above April's 0.5% gain, indicating solid underlying consumer demand
• Lower-income households have spent down over 60% of their 2026 tax refunds compared to 43% at the same point in 2025, suggesting weakening spending power ahead
• The Federal Reserve is expected to hold interest rates steady at 3.50%-3.75% despite the strong sales data, with economists ruling out rate hikes this year due to easing oil prices

US Retail Sales Exceed Expectations in May

Key Figures:

U.S. retail sales rose 0.9% in May, significantly exceeding economist forecasts of 0.5%. April's figure was revised downward to 0.4% from 0.5%. Core retail sales—excluding automobiles, gasoline, building materials, and food services—increased 0.7% after a 0.5% gain in April.

Market Drivers:

The stronger-than-expected sales were partly driven by elevated gasoline prices, which reached four-year highs amid the U.S.-Israeli conflict with Iran. Gas prices have since fallen below $4 per gallon following a ceasefire agreement announced Sunday. Tax refunds and a stock market rally also supported spending, though the personal savings rate dropped to a four-year low in April.

Economic Context:

Consumer spending accounts for over two-thirds of the U.S. economy and grew at a 1.4% annualized rate in Q1, while GDP expanded 1.6%. The Atlanta Fed projects Q2 GDP growth at 2.8%. However, economists warn of an impending slowdown as tax refunds are depleted. PNC Financial analysis shows households, particularly lower-income brackets, are spending refunds more rapidly than previous years—60% versus 43% at the same point last year.

Monetary Policy Implications:

The retail sales data is not expected to influence Federal Reserve policy. The Fed is anticipated to maintain its benchmark interest rate in the 3.50%-3.75% range at Wednesday's meeting. Despite rising price pressures, economists do not expect rate hikes this year, citing easing oil prices.

Outlook:

Spending momentum faces headwinds as tax refund cushions diminish and savings rates remain low, suggesting potential deceleration in consumer activity ahead.