The U.S. consumer entered 2026 facing a complex mix of macroeconomic pressures and residual policy supports. Recent geopolitical developments and the oil-driven inflation curveball have meaningfully impacted consumer sentiment. Real consumer spending growth is now expected to slow to ~2.1% in 2026, down from 2.7% in 2025, reflecting the combined impact of higher prices, softer labor income trends, and elevated mortgage rates (a ~6.5% national average for 30-year mortgages). The University of Michigan Consumer Confidence Index (which tends to be more inflation-sensitive) has fallen to near-historical lows following a sharp rise in fuel prices (the national average for gasoline approaching $4/gal), underscoring the inflation sensitivity of lower- and middle-income cohorts.
The primary drivers of this deceleration remain rising near-term inflation expectations, weakening labor dynamics, and tighter financial conditions. Energy and food price increases are eroding real purchasing power, while payroll growth will likely remain subdued in the ‘low-hire, low-fire’ backdrop, and the unemployment rate will likely trend higher. Yet, the direct impact of higher oil prices on household financial stress appears limited. Gasoline spending accounts for only a small share of total consumer expenditure (~3.4% vs. a peak of 5% in 2008), and even a meaningful rise in fuel costs translates into only a modest increase in overall spending. The bigger impact on consumers is the market’s expectation of a prolonged restrictive monetary policy outlook from the Federal Reserve amid rising inflation expectations, which in turn weighs on the medium-term outlook for consumer credit costs.
Despite these headwinds, certain policy tailwinds remain, albeit weaker than previously expected. Fiscal policy continues to provide modest support through tax adjustments and residual savings buffers, particularly for higher-income households. Retroactive tax adjustments mean the average IRS 2025 refund is estimated to be $800 higher this year, injecting ~$90 billion in liquidity into households. Moreover, balance sheet dynamics remain uneven across income cohorts, reinforcing a “K-shaped” consumption environment. Lower- and middle-income households face disproportionate pressure due to greater exposure to inflation in essential goods and limited financial buffers, while higher-income consumers remain more insulated, with stronger balance sheets. The latter element and the labor market’s relative stability are reflected in the Conference Board Consumer Confidence Index, which has diverged lately from the UMich Consumer Sentiment Index.
In conclusion, the U.S. consumer sector is slowing but not breaking. Downside cyclical risks are skewed toward weaker sentiment and a softening labor market, rather than an immediate credit or spending shock. On balance, headwinds from inflation and policy constraints are being partially offset by ongoing fiscal support and healthy high-income balance sheets, resulting in a more fragile yet still resilient consumer outlook. From an investment perspective, this environment favors a selective and quality-biased approach. Within equities, companies with pricing power, strong balance sheets, and exposure to higher-income consumers should continue to outperform, while more rate-sensitive and lower-income exposed segments remain vulnerable.
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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The U of M Consumer Sentiment Index is a survey of consumer confidence conducted by the University of Michigan and Thompson Reuters. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.
