Consumer spending cools to 0.2% in July, slowest in 14 months

US consumer spending rose 0.2% in July, the slowest pace in 14 months, as households pulled back on gasoline, autos and recreational goods after the end of the 2026 World Cup. The $36.3 billion gain beat the 0.1% consensus forecast but slowed from June's 0.3% advance, Commerce Department data showed.

"The service sector is now playing a key role in driving a sustained U.S. expansion, underscoring a dependency on consumer spending and financial services growth," said Chris Williamson, chief business economist at S&P Global.

Goods spending fell $49.9 billion, led by a $14 billion drop in gasoline and other energy goods, a $13.6 billion decline in recreational goods and vehicles and a $9.4 billion slide in motor vehicles and parts. Services spending rose $86.2 billion, with financial services and insurance up $24.3 billion, health care up $23.2 billion and housing and utilities up $16.4 billion. Inflation-adjusted consumer spending was broadly flat in July after a 0.4% gain the prior month.

The cooling points to a softer second half after consumer spending expanded at a 3.4% annual clip in the second quarter, when gross domestic product grew 1.5%. Goldman Sachs economists expect inflation-adjusted consumer spending to grow 1%-1.5% in the second half of 2026, down from 1.8% in the first half, as the stimulus from tax refunds fades.

The second-quarter slowdown follows a period of strong demand. Consumer spending expanded at a 3.4% annual clip from April through June, up from 0.5% in the first quarter, even as overall GDP growth slowed to 1.5% from 2.1%. The gap reflects a 12.5% annual surge in imports, which sliced 1.64 percentage points off growth as shipments of computer chips and other products supporting artificial intelligence investment rose. The pullback also reflects the spike in energy prices caused by the conflict with Iran, which pushed up gasoline costs and left less room for discretionary purchases.

Retail sales and sentiment flag a broader slowdown

The July spending data follows a 0.6% drop in retail sales, well short of forecasts, after a 0.2% increase in June, the Census Bureau reported Aug. 14. Households spent less at auto dealerships, furniture stores, restaurants and other retailers. Consumer sentiment fell 8% this month after two straight months of improvement, with expectations for business conditions down 11% for the short run and 17% for the long run, according to Joanne Hsu, director for surveys of consumers at the University of Michigan.

The Conference Board's Leading Economic Index rose 0.2% in July, recovering from a 0.1% decline in June, though a slump in consumer expectations for business conditions was the only component that declined. "Gloomy consumer expectations may slow economic growth in coming months," said Justyna Zabinska-La Monica, the Conference Board's senior manager for business cycle indicators.

Business activity booms even as households cool

The consumer pullback contrasts with a surge in business activity. S&P Global's purchasing managers index combining services and manufacturing rose to 56 in August from 54.5 in July, the highest in 52 months, as companies responding to rising demand added jobs at the fastest pace since early 2025. Strong business investment and high equity prices will likely help fuel overall growth, with Goldman Sachs forecasting 2.1% gross domestic product growth this year, matching last year's rate.

The divergence between cooling households and booming business leaves the Federal Reserve in a delicate spot: inflation-adjusted spending is flat and retail sales are contracting, yet the economy is still adding jobs at a brisk clip. With consumer spending accounting for about 70% of U.S. economic activity, a sustained pullback would ripple through corporate earnings and equity valuations. Markets will watch the Fed's September meeting for any shift in its assessment of consumer demand, and whether the central bank prepares to ease policy to support spending. If the slowdown deepens, economists expect the Fed to cut rates before year-end; if the AI-driven capex cycle holds up, the central bank may hold steady and let the divergence resolve itself.

This article is for informational purposes only and does not constitute investment advice.