The American consumer has been the economy's most reliable engine for years, powering through inflation, rising interest rates, and geopolitical turmoil with seemingly inexhaustible spending power. But according to Moody's Ratings, that engine is about to downshift significantly.

Real consumer spending growth is expected to decline to about 1.5% in 2026, according to a new report from Moody's—roughly half the 2.5% to 3% annual growth seen from 2023 to 2024. While consumer spending will remain the backbone of the U.S. economy, the slowdown marks a meaningful deceleration that could ripple through retail, hospitality, and service industries.

The 'Spending Hangover' Effect

Following a holiday season that saw nominal sales cross the historic $1 trillion mark, the retail industry is bracing for what economists call a "spending hangover."

The phenomenon has several causes:

  • Record-high household debt: American consumers have accumulated unprecedented levels of credit card and personal loan debt
  • Front-loading purchases: Many consumers accelerated spending in late 2025 to beat anticipated 2026 tariff increases
  • Inflation fatigue: While price increases have moderated, cumulative inflation since 2020 has eroded purchasing power
  • Interest rate burden: Higher rates on credit cards, auto loans, and mortgages consume more household income

"The 2025 holiday season was characterized by what economists are calling an 'inflationary mirage,'" notes Moody's analysis. "While nominal retail sales grew by approximately 4.1% year-over-year, real unit volume growth was a more modest 2.2% once adjusted for persistent price increases."

The K-Shaped Consumer Economy

Perhaps more significant than the overall slowdown is the widening divide between America's haves and have-nots. Bank of America Institute describes the theme for 2026 as "resilient"—but with an important caveat.

"Though there is a distinct gap between higher-income and lower-income households, spending, wages and income continue to grow for both groups," according to the bank's consumer outlook.

PitchBook's 2026 forecast is blunter, predicting a "K-shaped economy" that will deepen the divide between retail's winners and losers:

  • Companies within the AI ecosystem are expected to thrive
  • Luxury brands with wealthy customer bases should maintain momentum
  • Value-focused retailers are poised to gain market share as consumers trade down
  • Middle-market retailers face the greatest pressure

What the Data Shows

Recent economic data supports the mixed picture:

November retail sales rose 0.6% from the previous month and 3.3% from November 2024, according to Census Bureau data released this week. That sounds healthy, but beneath the surface:

  • Lower-income consumers are increasingly relying on credit to maintain spending
  • Auto loan delinquencies have risen to multi-year highs
  • Buy-now-pay-later usage has surged, creating what some call "phantom debt"
  • Savings rates remain well below pre-pandemic levels for most income groups

Value Retailers Positioned to Win

"Value-focused retailers are poised to gain market share as consumers trade down," Moody's analysts note.

This trend has already begun playing out in corporate earnings. Dollar stores, off-price retailers like TJX and Ross, and warehouse clubs have reported stronger comparable sales growth than traditional department stores and mall-based retailers.

The shift reflects a fundamental change in consumer behavior: even households with stable incomes are becoming more price-conscious, seeking value and cutting back on discretionary categories.

Tariff Uncertainty Adds Pressure

The Trump administration's tariff policies add another layer of uncertainty to the consumer spending outlook. Many retailers reported that consumers "front-loaded" purchases in late 2025 to avoid potential price increases—spending that won't repeat in 2026.

If new tariffs take effect as planned, retailers face a difficult choice: absorb higher costs and accept lower margins, or pass them on to consumers who may already be pulling back.

Retail Executive Sentiment

Despite the cautious consumer outlook, retail executives remain surprisingly optimistic—at least publicly. According to Deloitte's retail industry survey:

  • 96% of global retail executives expect industry revenues to grow in 2026
  • 81% foresee margin expansion

That optimism may reflect expectations of market share gains among survivors as weaker competitors exit, rather than a belief in robust overall demand growth.

What It Means for the Economy

Consumer spending accounts for roughly 70% of U.S. GDP, making any slowdown significant for overall economic growth. If Moody's forecast proves accurate:

  • GDP growth could decelerate from current levels
  • Employment growth in retail and hospitality may slow
  • The Federal Reserve may face less inflationary pressure—but also less economic momentum
  • Corporate earnings in consumer-facing sectors could disappoint

What Consumers Should Consider

For individual households navigating this environment:

  • Build or maintain emergency savings: Economic uncertainty makes a financial cushion more valuable
  • Pay down high-interest debt: Credit card rates remain elevated; reducing balances improves financial flexibility
  • Be strategic about major purchases: Tariff-related price increases may affect some categories more than others
  • Consider value alternatives: Trading down to store brands or off-price retailers can stretch budgets

The American consumer isn't disappearing—far from it. But the spending growth that powered the post-pandemic recovery is normalizing, and 2026 looks set to be a year when financial prudence trumps pandemic-era revenge spending.

For retailers, that means competing harder for a slower-growing pie. For consumers, it means the savings and debt decisions made now will shape financial health for years to come.