Drop in retail sales underscores a shift to services spending

U.S. retail sales fell in July by more than forecast, reflecting a steady shift in spending toward services and indicating consumers may be growing more price conscious as inflation picks up.

The value of overall retail purchases dropped 1.1% last month following an upwardly revised 0.7% increase in June, Commerce Department figures showed Tuesday. The median estimate in a Bloomberg survey of economists called for a 0.3% decrease. Excluding autos, sales decreased 0.4% in July.

Total receipts trailed estimates by a wide margin as declines in motor vehicle and e-commerce sales weighed on the figure. Restaurant spending increased, though at a more moderate pace than in previous months.

The emergence of the delta variant could curb demand for services like travel and entertainment going forward. Higher prices for things like groceries, meals out, personal care and apparel also risk limiting discretionary spending in the coming months.

A report last week from the University of Michigan showed buying conditions deteriorated to the lowest since April of last year as inflation remained elevated. The retail sales data are not adjusted for price changes.

The figures Tuesday point to a softening in third-quarter consumer spending growth. Economists forecast outlays to grow at an annualized 4.5% pace in the current period, significantly slower than the pace estimated a month ago and a sharp deceleration from the sizzling 11.8% rate seen in the second quarter.

Morgan Stanley economists led by Ellen Zentner said the weakening in sales lowered their tracking estimate for third-quarter economic growth to 6.5% — the same as last quarter — from 6.9%.

Stocks dropped after the report. Traders also digested separate data released Tuesday showing U.S. factory output rose more than expected in July.

This week also includes earnings reports from many retailers, including Target Corp. and Macy’s Inc. Earlier Tuesday, Walmart Inc. posted strongerthan-expected comparable sales and the retail giant boosted its full-year outlook.

Results from Home Depot Inc., however, showed weaker-than-expected results that signal a cooling in the home-improvement boom.