Retail Sales Slide as Trade War Bites
U.S. retail sales contracted by 0.9% in May 2025, the sharpest monthly decline since March 2023, signaling a decisive shift in consumer behavior following a tariff-driven surge earlier in the spring. This contraction—amounting to a drop to $715.4 billion—reflects the aftermath of accelerated purchases in March and April, when consumers stocked up on goods ahead of the anticipated implementation of new tariffs announced by President Trump. The pullback was broad, with auto sales down 3.5%, and restaurants, furniture, and building supplies also posting declines. However, core retail sales—excluding autos, gas, and restaurants—grew slightly by 0.1%, indicating underlying spending resilience.
Simultaneously, U.S. industrial production fell 0.2%, pointing to softening manufacturing momentum. These twin signals highlight emerging economic strain amid rising prices, particularly from increased import costs (up 0.4% in May). The Trump administration's "Liberation Day" tariff campaign, targeting countries deemed to have unfair trade practices, has added significant pricing pressure across supply chains. With the next phase of tariffs set to activate after July 8, 2025, the data underscores both immediate demand volatility and the risk of deeper economic dislocation heading into the second half of the year. Markets responded cautiously, while economists now forecast slower Q3 GDP growth and increasing pressure on the Federal Reserve to intervene.
Scenario Forecast
Base Case: “Volatility with Resilience” – 55% Probability
In this most likely outcome, consumer demand remains volatile through the summer, but core spending avoids a collapse. Retail sales rebound modestly in June and July as households adjust to higher prices and smooth out earlier front-loaded purchases. Core inflation continues creeping up, driven by tariff-related import costs, but remains manageable due to softening commodity prices and stable wage growth. The Federal Reserve holds rates steady into September, signaling readiness to act if consumer weakness spreads. Politically, Trump’s administration extends current tariffs without escalating them, providing some breathing room for importers. GDP growth slows to around 1.4–1.6% in Q3, but recession fears do not materialize. Financial markets stay choppy, with investor attention split between earnings pressure and hopes of Fed intervention.
Upside Case: “Policy Reset Sparks Stability” – 20% Probability
This scenario hinges on a strategic recalibration by the Trump administration, which faces mounting pressure from business lobbies and consumer groups. In early July, the White House announces a temporary suspension or scaling back of tariff hikes set for July 8, easing supply chain and pricing pressures. Retailers and manufacturers respond positively, helping stabilize inventories and improve sentiment. Consumer spending picks up by late summer, especially in services and housing-related goods. The Fed maintains its current stance but signals confidence in economic momentum. Markets rally as Q3 GDP rebounds toward 2%, and core inflation trends lower due to reduced import costs. Trade tensions remain high, but strategic de-escalation reduces uncertainty and limits geopolitical fallout.
Downside Case: “Tariff Shock Entrenches Weakness” – 25% Probability
In this adverse outcome, the Trump administration proceeds with its full July tariff schedule, and foreign retaliation intensifies. Consumer prices rise further into August and September, eroding real incomes and suppressing discretionary spending. Retailers begin aggressive discounting, but excess inventories and weak foot traffic lead to a rise in bankruptcies and layoffs, especially among mid-tier chains. Industrial production continues declining, with durable goods orders collapsing under pressure. Financial markets decline more sharply, with the S&P 500 correcting by 10–12% from its April highs. Investor confidence fades, prompting a flight to quality assets and pushing the Fed to cut rates in September. Q3 GDP drops below 1%, triggering stagflation concerns and increasing recession probabilities heading into 2026.
