Intro:
While media narratives continue to warn of economic softening, a clearer picture is emerging from recent consumer sentiment and retail data. July brought a third straight month of improvement in how Americans view the economy—yet inflation pressures and trade policy uncertainty still loom large. Here's what CoStar’s economists have to say:
A buoyant stock market and a temporary pause in tariff tension helped temper American consumers' pessimism last month, according to a handful of data releases.
Whether the improving sentiment persists could depend on what happens August 1, when a pause in U.S. tariffs is scheduled to expire, and whether inflation continues to seep in to the price of consumer goods.
According to the University of Michigan’s monthly consumer sentiment survey, Americans’ economic mood improved into early July. The sentiment index increased to 61.8 in its preliminary reading, up 1.8% compared to June.
This marked the third consecutive month of improvement and the highest sentiment reading since February. Still, overall sentiment is down more than 16% since its peak in December 2024 and, aside from the recent decline in early 2025, the index remains lower than at any time since November 2023.
Contributing to the sentiment could be consumers’ inflation expectations, which, while easing, remain around a two-year high.
Adding to the prevailing level of uncertainty, the Conference Board’s leading economic indicators index continued to deteriorate in June. As the index measuring manufacturers’ new orders fell and unemployment claims rose, the index fell by 2.8% in the first half of 2025, a faster pace of deterioration than the 1.4% the year prior.
In the Michigan consumers’ survey, current conditions performed better than short-term expectations. Evidence of the improved sentiment could be found in retail sales data, which grew 0.6% on a nominal basis in June. It was only the second month of positive retail sales growth in 2025, coming after consumers had front-loaded purchases in advance of the imposition of tariffs with a March buying spree and then cut back on discretionary spending in later months.
The retail sales recovery was broad-based across categories, including some signs that consumers were ready to spend on discretionary items again. Restaurant spending increased by 0.6%, outpacing the comparable food away from home category of the consumer price index, which rose 0.4%.
At the same time, though, tariff-impacted categories such as electronics and furniture showed continued weakness, both falling 0.1% in the month, even as their comparable price indices increased 0.4% for furniture and 1.9% for appliances in the month. And as price increases became more apparent in other tariff-impacted goods, nominal growth in some categories could have been influenced by inflationary pressures as well as organic demand. Sporting goods stores, for example, reported a 0.2% increase in sales while the comparable consumer price index rose 1.4%.
Car prices, a much larger category of sales, continued to decline, with the used car and truck price index down 0.7% in June and new vehicle prices down 0.3%. At the same time, nominal sales to auto and other motor vehicle dealers were up 1.4%. Despite the increase in total auto spending, though, unit sales data shows a slight decline in the number of cars sold in June, perhaps reflecting the continued resilience of higher-end consumers who are more likely to purchase higher-value brands.
The appearance of price increases in the June inflation data comes simultaneously as consumer expectations of inflation are softening. One driver of the improved mood in the University of Michigan survey was a downtick in inflation expectations for the next year.
Survey respondents’ inflation expectations fell to 4.4%, their second consecutive monthly decline after a peak of 6.6% in May. Though those short-term inflation expectations remain the highest since late 2023, the limited impact of tariffs on headline inflation so far is helping to anchor expectations.
With trade policy still to be resolved, and amid other geopolitical tensions, including the Ukrainian conflict and turmoil still to be managed in the Middle East, uncertainty remains elevated, which would be expected to weigh on business and consumer sentiment. Yet the economy appears on an even keel, and equity markets have recovered and moved higher from their April lows.
How this discordance is resolved remains to be seen. Still, the tight balance has the Federal Reserve in a holding pattern until incoming data either shows continued positive momentum for the economy, which may motivate a rate increase, or a deterioration of labor market conditions, which would call for a rate cut. Neither seems immediately likely.
CoStar Economy is produced this week by Christine Cooper, CoStar's managing director and chief U.S. economist, and Chuck McShane, senior director of market analytics.
Conclusion:
What does this mean for investors and property owners?
While inflation expectations are moderating, discretionary spending is coming back in targeted sectors—particularly among higher-income consumers. With tariff deadlines approaching August 1 and the Fed signaling no immediate change in rates, we’re in a crucial window where commercial real estate investors can take advantage of interest rate spreads and buyer hesitancy.
Expect more volatility in the months ahead, but as always, smart positioning and local market knowledge will determine who wins.
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