The health of the US consumer is one of the most important determinants of the global economic outlook. Household consumption accounts for almost 70% of US GDP and, given the scale of the US economy, represents close to one quarter of global GDP. When American consumers spend freely, corporate revenues strengthen, hiring accelerates and investment activity increases. These dynamics support global demand through both trade and confidence channels. Conversely, when households retrench, the impact is felt far beyond the United States, often preceding broader economic slowdowns and heightened market volatility. Understanding the state of the US consumer is therefore essential for making informed investment decisions.
Over recent years, consumer spending in the US has remained resilient despite significant macroeconomic headwinds. Rising interest rates, elevated inflation and tighter financial conditions posed clear risks to household finances yet spending levels remained surprisingly strong. This resilience was underpinned by several factors. First, the labour market was exceptionally tight, with unemployment remaining near historic lows and job openings plentiful. Second, wage growth was robust, which helped offset the erosion in real purchasing power caused by inflation. Third, savings accumulated during the pandemic acted as a buffer, particularly for middle and higher income households. Many observers argued that this combination would allow households to absorb higher borrowing costs for longer than usual. Markets, in turn, embraced this narrative and consumer exposed sectors of the equity market proved more durable than expected.
However, as we enter 2026, there are increasing signs that consumer momentum is slowing. Real personal consumption growth has moderated visibly since late 2024 and has effectively flattened in recent months. Households continue to spend in nominal terms, but a growing share of this reflects higher prices rather than increased volumes. This distinction matters because it signals a consumer who is becoming constrained by rising costs rather than choosing to spend more. The slowing in real demand is most apparent among lower income households, where inflation has had a more persistent effect.
The composition of spending is also shifting. Discretionary categories, including big ticket items, leisure activities and non essential retail, are losing momentum. Services spending, particularly in travel and hospitality, is normalising following the powerful post pandemic surge. Households are becoming more selective, prioritising essential goods and adjusting discretionary purchases as financial pressures build. This behavioural shift is especially evident in retail trends where discount retailers and value oriented brands have been gaining market share, while traditional mid market chains face declining footfall and, in many cases, store closures. The pattern points to both increased price sensitivity and overcapacity in parts of the retail sector.
A key structural factor behind the change in spending patterns is the depletion of excess savings. Most of the additional household savings accumulated during the pandemic have now been run down, particularly across lower and middle income cohorts. With that buffer exhausted, many households have turned increasingly to credit in order to maintain consumption. US household debt has reached record levels, driven largely by rising credit card balances, auto loans and other high cost borrowing. At the same time, the cost of servicing variable rate debt has risen significantly, pushing debt service ratios higher and reducing disposable incomes. Delinquency rates, while not yet alarming, are moving up steadily, especially among younger borrowers and those with lower incomes. Auto loan delinquencies have also risen, reflecting high financing costs and elevated vehicle prices.
Consumer confidence provides another important lens through which to interpret household behaviour. Sentiment indicators have been notably weaker over the past year, with households expressing persistent concerns about inflation, job security and the economic outlook more broadly. Although confidence has recovered modestly from its post pandemic lows, it remains well below levels that have historically been associated with strong consumption growth. The current disconnect between subdued confidence and still positive nominal spending is unlikely to remain indefinitely. History suggests that when households become more pessimistic, spending patterns typically adjust to reflect that sentiment.
The labour market, which had been the key source of consumer resilience, is also showing signs of cooling. Job growth has slowed, hiring intentions have softened and layoffs have picked up in sectors such as technology, financial services and parts of manufacturing. Although unemployment remains low by historical standards, the direction of travel is less supportive than it was a year ago. Wage growth is also decelerating, reducing the rate at which real incomes can grow. Given that labour market conditions are a primary driver of consumer spending decisions, any deterioration here could have material effects on consumption. When job security feels less certain and wage growth slows, households tend to become more cautious and increase precautionary savings.
Inflation dynamics also play a central role in shaping consumer behaviour. While inflation has eased materially from its peak, it remains above the Federal Reserve’s 2% target. The stickiness of price pressures limits the scope for aggressive interest rate cuts. Higher interest rates, in turn, prolong the period during which households face elevated borrowing costs. Whether a rapid return to low inflation is desirable depends on the underlying cause of disinflation. If inflation falls because demand is weakening, the trade offs for growth become more challenging. Even a modest slowdown in consumer spending can have significant effects on the broader economy, especially in services sectors that are highly dependent on steady demand.
Although this analysis focuses primarily on the US, the pressures on households are not confined to one geography. In the UK and Europe, consumers continue to grapple with high living costs, elevated mortgage rates and the effects of fiscal tightening. Real incomes are recovering only slowly, and confidence remains fragile. In Japan and China, weak domestic demand has prompted renewed policy support. For many emerging economies, tighter global financial conditions and slower global trade are constraining household spending. Taken together, these developments point to a broader global theme of households entering a more constrained phase of the cycle.
Despite these challenges, a more pronounced economic slowdown is not our central scenario. Several factors provide important offsets. Global manufacturing appears to be stabilising and, in some regions, recovering. The technology led investment cycle remains a powerful driver of capital expenditure. Advances in artificial intelligence and automation may support productivity in the medium term. For markets, the implications of a weakening US consumer are likely to be nuanced rather than uniformly negative. Within equities, consumer staples companies and discount focused retailers may benefit from increased price sensitivity. Conversely, discretionary segments such as travel, leisure and luxury goods may face more headwinds. Banks could encounter slower loan growth and rising delinquencies, while lower interest rates may compress margins. Bond markets, however, may stand to gain if slower consumer activity accelerates the shift toward easier monetary policy. Government bonds and high quality credit would likely benefit from lower inflation expectations and reduced growth momentum.
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