Is the US Consumer Finally Slowing Down?

American consumers have remained surprisingly resilient through several years of high inflation, expensive borrowing, and higher interest rates.

Employment and wage growth helped households keep spending, while rising stock prices supported wealthier consumers. Even as confidence weakened at different points, actual spending often held up better than surveys suggested.

Recent data, however, show more signs of pressure. Retail sales have weakened, confidence has fallen again, and the labor market is losing some momentum. The question is no longer simply whether Americans are still spending, but where they are beginning to cut back.

July Retail Sales Sent a Warning

The clearest sign came from July retail sales.

US retail sales fell 0.6% from the previous month, the first decline in nine months and the largest in 14 months. Core retail sales, which feed more directly into GDP calculations, dropped 0.4%. 

The decline was broad enough to attract attention, but some temporary factors also played a role:

• Amazon moved Prime Day into June, shifting some online spending earlier.
• Lower gasoline prices reduced spending at gas stations.
• Auto and electronics sales declined.
• Clothing stores and restaurants still recorded gains.

Retail sales were also about 5% higher than a year earlier, suggesting that consumers have slowed rather than stopped spending. 

The latest numbers therefore raise a more useful question: Are Americans spending less overall, or becoming more selective about what they buy?

Confidence Is Falling Faster Than Spending

Consumers are clearly becoming less comfortable with the economic outlook.

The Conference Board’s Consumer Confidence Index fell from 92.2 in June to 90.8 in July. Its Present Situation Index, which measures views of current business and labor conditions, declined for a third consecutive month. 

August brought another weak signal. The University of Michigan Consumer Sentiment Index dropped from 55.2 to 51.0, reversing two months of improvement. Short-term inflation expectations also increased to 4.3%, as higher living costs continued to weigh on households. 

Still, confidence and spending do not always move together. Consumers can feel pessimistic about the economy while continuing to spend as long as employment and income remain relatively stable.

That makes the labor market especially important.

Jobs Could Decide What Happens Next

At the end of the day, people spend based on what they earn.

Households can absorb higher prices and borrowing costs for longer when employment is strong. Once job growth weakens, however, larger purchases become easier to postpone and discretionary spending can come under pressure.

Recent labor data has added to those concerns. July’s employment report showed job losses, while inflation-adjusted wages were 0.2% lower than a year earlier in July. 

The combination of weaker retail sales, softer employment, and milder inflation has already affected expectations for monetary policy. The probability of a September Fed rate hike fell sharply following the latest data, while Goldman Sachs lowered its third-quarter US growth estimate to 2.2% after the retail sales report. 

For the consumer outlook, employment may now provide a clearer signal than confidence surveys alone. If jobs and incomes hold up, spending can continue at a slower pace. A deeper deterioration in the labor market would make that resilience much harder to maintain.

Credit Is Showing More Pressure

Consumers have kept spending partly by taking on more debt. US households are carrying around $18.8 trillion in total debt, while credit card and auto loan balances remain high.

The latest data shows some households are finding those balances harder to manage, particularly after several years of high interest rates. Auto borrowing reached a record in the second quarter, while credit card and home equity balances also increased. 

This does not point to a broad consumer credit crisis. But expensive borrowing leaves households with less flexibility, especially those already relying on credit to cover everyday expenses.

Big Purchases Are Getting Harder to Justify

Pressure is easier to see when purchases require financing.

Housing is a clear example. The average 30-year mortgage rate is around 6.77%, making monthly payments much more expensive than they were during the low-rate years. In July, single-family housing starts fell 9.9% to a 3.5-year low, while contracts to buy existing homes declined 2.3%. 

Similar pressures can affect cars, furniture, appliances, and major home renovations. Rather than cutting spending everywhere, households may simply postpone purchases that require large upfront costs or new debt.

That helps explain why consumer weakness can appear in some industries well before it becomes visible across overall retail spending.

Home Depot Shows Where Consumers Are Still Spending

Home Depot’s latest results provide a useful example of that divide.

Second-quarter revenue increased 5.7% to $47.86 billion, beating expectations, while US comparable sales rose 1.3%. Adjusted earnings of $4.92 per share also came in above forecasts.

The details are more interesting than the headline numbers. Demand remained healthy for smaller repair and maintenance projects, while high mortgage rates continued to limit larger renovations. The average customer transaction was around $90. 

Consumers are still spending on their homes, but they appear more selective about the size and urgency of those projects.

Walmart Might Give Us the Next Clue

Walmart offers a different view of household spending because much of its business comes from groceries and everyday essentials.

Its previous quarterly results showed US comparable sales growth of 4.1%, while e-commerce continued to expand. The company nevertheless kept a cautious outlook, pointing to more price-conscious shopping behavior. 

Its next results could provide more detail on how spending is changing across income groups. Useful signals include:

• Grocery versus discretionary sales
• Customer traffic and average spending
• Private-label demand
• E-commerce growth
• Full-year guidance

Walmart’s growing advertising business also complicates the picture. Walmart Connect recently posted 44% growth, meaning stronger company profits do not necessarily indicate stronger consumer spending.

Home Depot and Walmart offer a clearer picture than headline retail sales alone: what consumers still consider worth buying, what they are postponing, and where they are becoming more price-conscious.

Not Every Consumer Is Slowing at the Same Pace

The pressure is not evenly distributed. Higher-income households have benefited more from rising asset prices and generally have greater savings, while lower-income consumers are more exposed to higher food, housing, and borrowing costs.

Recent company results reflect this divide. Some discretionary categories continue to perform well, while retailers such as Walmart and Kroger have reported more price-conscious shopping behavior.

This helps explain why overall spending can look relatively healthy even as financial pressure increases for part of the population.

What It Means for Stocks

A slower consumer can affect sectors very differently.

Companies selling everyday essentials may hold up better, while businesses tied to large or discretionary purchases can be more sensitive to weaker spending.

For traders, the consumer story also reaches beyond retail stocks. Softer spending can reduce economic growth and inflation pressure, influencing Fed expectations, Treasury yields, the dollar, and major equity indices. July’s 0.6% retail-sales decline, alongside milder inflation and weaker employment data, has already reduced expectations for another near-term Fed hike.

What to Watch Next

The next few months should provide a clearer picture of whether July was a temporary slowdown or part of a broader trend.

Key indicators include:

• Retail sales and consumer spending
• Payrolls, unemployment, and wage growth
• Consumer confidence
• Credit-card delinquencies
• Retailer earnings and guidance
• Inflation and Fed expectations

The relationship between jobs and spending will be particularly important. A stable labor market could keep consumption growing at a slower pace, while further weakness would put more pressure on household budgets.

For now, the data points to more selective spending rather than a broad pullback. The next test will be whether weaker confidence and employment begin to translate into a more sustained decline in consumption.

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