Chief Global Strategist
I was watching a football game over the weekend and I saw a giant lineman go down. He was in obvious pain and hobbled, assisted and very slowly, to the sideline. The TV commentators, to my amazement, said he didn’t look too bad and he was probably healthy enough to return to the field in a snap or two. But to look at this man, battered, bruised and probably many times concussed, his frame swollen by a cardiac nightmare of a diet, his veins pumped up with sugar, caffeine and who knows what else, you’d have to ask “in what world could anyone truly call him healthy?”
Despite multiple challenges, we expect American consumers to be back on the field again in 2026. But consumers, in aggregate, are far from healthy. While we expect spending to grow – it’s likely to grow only slowly and it remains vulnerable to intensified policy headwinds or a withdrawal of the fiscal and wealth supports that have sustained it in recent years.
As government data begin to flow again and at the start of the holiday shopping season, this is a good time to consider the health of the consumer. This checkup starts with a review of recent spending momentum, then considers the main drivers of consumption and how they are likely to evolve over the next year and ends with a rough forecast of where we see spending over the rest of 2025 and in 2026.
Recent Trends
Recent consumer trends are a little harder than usual to assess due to a lack of up-to-date government data. The Census Bureau has announced that they will release the long-delayed September retail sales report this Tuesday, November 25th, while the Bureau of Economic Analysis has yet to announce the release date for September personal income and consumption.
However, even with these gaps, we can tell some things about the recent pace of consumer spending.
Auto sales have dipped in recent months. Government data through August and industry data for September suggest sales rose from 16.1 million units annualized in the second quarter to 16.4 million in the third. However, industry estimates for October and forecasts for November (with one week to go) suggest sales are tracking just a 15.4 million unit pace this quarter. The expiration of electric vehicle tax credits at the end of September may be responsible for some of this drop. Nevertheless, auto sales look relatively sluggish as we head towards the end of the year.
Travel spending is also looking weak. Hotel occupancy was down 2.4% year-over-year in October, in an eighth consecutive monthly decline, while TSA data suggest a domestic air travel slump in November, partly due, no doubt, to the effects of the government shutdown.
Chase card data confirm travel industry weakness and softness in supermarket and restaurant sales through mid-November, although reservations from Open Table remain strong, suggesting that the weakness in restaurant sales is concentrated in the lower end of the market. Chase data also show strong spending in wholesale and discount stores while Adobe data show continued strength in on-line spending in October.
Real consumer spending grew at an annualized pace of 2.5% in the second quarter and an estimated 3.2% in the third. So far, at the kickoff of the holiday season, it appears to be on track to grow by 1.4% in the fourth quarter. Thereafter, the strength of consumer spending will depend on a number of factors, including real disposable income, wealth, credit, demographics and confidence.
The Drivers of Consumer Spending
Real Disposable Income: The most important driver of real consumer spending is real disposable income. This, in turn, depends on personal income, taxes and inflation.
Wage income should be held in check by slow growth in employment, with job growth likely averaging below 100,000 per month over the next year. While a lack of government data on legal immigration and deportations is making it harder to assess the true labor supply situation, private sector surveys, such as the monthly jobs report from the National Federation of Independent Business, show employers are still having a hard time finding qualified workers.
Meanwhile, recent readings on the unemployment rate, Conference Board survey data on “jobs plentiful” versus “hard to get” and continuing jobless claims all show rising labor market slack, even with constrained labor supply. This could cause some softening in wage growth, with recent data from Indeed showing a continued decline in year-over-year growth in advertised wage rates. We expect year-over-year wage growth to slow from 3.8% in September to roughly 3.5% in the year ahead.
Other components of personal income, including interest, rent, proprietors’ income and government transfers should also grow more slowly, reflecting Fed rate cuts, rising rental vacancy rates, a slow home-building market and federal government cutbacks. Overall, while personal income grew by 5.1% in the 12 months ended August 2025, we expect it to grow by just 3.6% annualized between August 2025 and December 2026.
Of course, for real consumer spending what matters is income after taxes and adjusted for inflation.
The new year will bring a bumper crop of income tax refunds. We expect the average refund to climb from roughly $3,200 this year to $4,000 in 2026, reflecting new tax breaks under OBBBA which were made retroactive to January 2025 and further boosted by the IRS delaying changes to withholding schedules. These changes should be implemented in January 2026, providing an extra boost to disposable income.
Higher inflation, conversely, will detract from the growth in real disposable income. While CPI inflation amounted to 3.0% year-over-year in September, we expect it to rise to 3.3% in December and 3.5% in June of next year, as tariff effects feed through.
Thereafter, inflation should slowly decline. However, without a further round of fiscal stimulus, real disposable income growth should fall to close to zero in the second half of 2026, as job growth remains sluggish and wage gains barely match inflation.
Wealth: Wealth effects should boost consumer spending going forward. Even after a recent pullback, the S&P500 is on track to post a double-digit percentage gain for a third year in a row. We estimate that, if stock prices ended the year at current levels, household net worth would be up by more than $10 trillion this year and $36.0 trillion, or 26%, over the past three years. These wealth gains should continue to support the spending of upper-income households, although they should have less impact on the spending of most American families, whose much smaller wealth gains are generally locked up in relatively illiquid assets such as their homes and 401ks.
Credit: While lower and middle income consumers have only partially participated in stock market gains, they still appear to have easy access to credit. In the third quarter, delinquency rates on credit cards and mortgages were at low levels and virtually unchanged from a year ago. Moreover, the Fed’s October senior loan officer survey showed banks, on average, a little more willing to make consumer installment loans. However, we have seen a spike in delinquencies on student loans, as the government has resumed reporting late payments to credit bureaus. Overall, consumer credit is increasing quite slowly – up by less than 2.5% year-over-year in the third quarter according to the Fed. However, so far, credit availability doesn’t appear to represent a significant threat to the consumer expansion.
Demographics: Demographics are another matter – although the lack of federal data in this area was a problem even before the government shutdown.
There are no monthly federal data on either births or deaths since June of 2024. However, state data suggest that U.S. births have stabilized at 3.6 million per year while deaths are running at 3.1 million, resulting in a natural increase in the population of 500,000. This will likely continue to drift down in the years ahead as births edge down and deaths slowly rise.
There are also no reliable data on legal immigration beyond May of this year, nor are there numbers on deportations. However, arrests by immigration authorities jumped to over 41,000 in October, their highest level since 2019, suggesting a continued ramp up in deportations. We believe that this, combined with a dramatic decline in unauthorized border crossings and a probable further decline in traditional immigration, has contributed to a very sharp reduction in net immigration.
In the first 20 years of this century, net immigration averaged about 1,000,000 per year. If it has now fallen to, say, 250,000 per year then, while the U.S. population should still be growing by about 0.2% per year, the working-age population is likely falling, hurting consumer spending both directly and indirectly, via weaker housing demand.
Confidence: Finally, consumer confidence remains very low. On Friday, the University of Michigan index of consumer sentiment was reported at 51.0, up from a preliminary 50.3 but still the second lowest monthly reading in history. This Tuesday’s Conference Board consumer confidence index should show a slightly stronger reading relative to its history. However, confidence surveys broadly show a downbeat and pessimistic consumer.
Confidence right now is being hurt by perceptions of a lack of “affordability” and some deterioration in labor market conditions. Sharp political divisions and social media impacts are undoubtedly also weighing on sentiment. That being said, consumers should feel better about recent wealth gains and low gasoline prices. If the stock market falters, general inflation and unemployment rise and gas prices tick up, confidence could well slump to new historical lows.
The Outlook for Consumer Spending and Investment Implications
So where does this leave us?
Our base case forecast is that, following a 1.4% annualized gain in the fourth quarter, real consumer spending rises at a 3.5% pace in the first half of 2026, due to income tax refunds, but then climbs at just a 0.5% pace in the second half of the year, as the spending level produced by refunds proves hard to sustain.
This still represents growth and should be sufficient, if combined with strong AI capital spending, to keep the U.S. economy out of recession. However, it should be recognized that the tax cuts and refunds boosting consumer spending in 2026 are deficit financed. We estimate that, because of these tax breaks, the federal budget deficit will rise from $1.775 trillion, or 5.9% of GDP, in fiscal 2025 to roughly $2.1 trillion or 6.6% of GDP in fiscal 2026. In addition, spending by upper-income consumers is being supported by the lagged impact of extraordinary stock market gains. If, as seems inevitable, deficits and stock market wealth stop rising faster than the economy itself, then the growth in real consumer spending should revert to a much weaker path laid out by trends in job growth and real wages.
For investors, consumer stocks have perhaps lagged too much behind the performance of their more exciting tech counterparts in recent years and could be due for a rally on valuation considerations alone. However, from a longer-term perspective, with very weak demographics, yawning inequality, meagre real wage gains and deeply imbedded pessimism, U.S. consumers just don’t look that healthy suggesting a need to focus on firms that can thrive in a soft U.S. consumer environment or take advantage of potentially stronger consumer trends overseas.