The U.S. economy closed out 2025 with deceptive strength. Third-quarter GDP grew at a blistering 4.3% annualized pace, the fastest expansion in two years, powered by consumer spending that defied expectations throughout the year. Americans spent over $1 trillion during the holiday season for the first time ever, according to the National Retail Federation.

But look beneath these impressive headlines and a more complicated picture emerges—one defined by a "K-shaped" recovery that's pushing prosperity to some Americans while leaving others further behind.

The Engine That Keeps Running

Consumer spending, which accounts for roughly two-thirds of U.S. economic activity, rose 3.5% in the third quarter, handily beating the second quarter's 2.5% gain. This resilience confounded economists who predicted that depleted pandemic savings, elevated interest rates, and stubborn inflation would finally force Americans to pull back.

Several factors helped sustain spending:

Wage growth: While cooling from post-pandemic peaks, wage gains continued to outpace inflation for much of the year, particularly for lower-income workers in service industries.

Wealth effect: The stock market's third consecutive year of double-digit gains boosted household net worth, encouraging spending among investors.

Credit availability: Despite higher rates, credit remained accessible, with household debt reaching record levels.

"The American consumer has been remarkably resilient, but resilience and sustainability aren't the same thing. We're seeing signs of stress that weren't visible even six months ago."

— Dr. Cynthia Rothstein, Chief Economist at Moody's Analytics

The K-Shape Widens

The most troubling trend of 2025 was the accelerating divergence between different segments of American consumers. A Bank of America Institute analysis revealed stark differences: spending among the top third of households by income rose 4% year-over-year in November, while spending among lower-income households has essentially flatlined.

This K-shaped pattern—where economic fortunes split between the upward and downward strokes of the letter—manifests in multiple ways:

  • Luxury versus necessity: High-end retailers reported strong sales throughout 2025, while dollar stores and discount chains struggled with inflation-weary customers trading down.
  • Assets versus wages: Stock and home price gains primarily benefited those who already owned assets, while non-owners faced rising rents and limited savings capacity.
  • Employment quality: White-collar job markets remained relatively stable, while layoffs in retail, manufacturing, and some tech sectors disproportionately affected middle and lower-income workers.

Confidence Craters

Perhaps the most striking disconnect of 2025 was between strong spending data and cratering consumer confidence. The Conference Board's consumer confidence index fell to 89.1 in December—its lowest point in five years—while the University of Michigan sentiment measure finished the year nearly 30% below where it started.

"Consumers' perceptions of the current state of the economy are at their lowest point in five years," noted Dana Peterson, chief economist at the Conference Board.

This paradox—spending remains strong while sentiment collapses—suggests that Americans are maintaining their lifestyles through means that may not be sustainable: drawing down savings, relying more heavily on credit, or postponing major purchases while continuing day-to-day consumption.

The Tariff Toll

President Trump's tariff policies, implemented and expanded throughout 2025, imposed meaningful costs on American households. Analysis from several research organizations estimated that tariffs cost the average family approximately $1,200 over the course of the year through higher prices on imported goods.

With additional tariff escalation possible in 2026, some retailers have delayed passing through cost increases, suggesting that consumer pain from trade policy may intensify in the coming months.

Labor Market Softening

The job market, while still functional, showed clear signs of cooling. Unemployment rose to 4.6% in November—the highest level since 2021—as monthly job gains became more erratic. November saw gains of 64,000 positions, but October actually recorded a loss of 105,000 jobs.

For consumers relying on employment income rather than investment gains, this softening raises questions about spending sustainability heading into 2026.

What Economists Expect for 2026

The consensus outlook for 2026 remains cautiously optimistic, but with notable caveats:

Growth expectations: Real consumer spending is projected to expand 2.2% in 2026, down from the 2.6% pace expected for 2025.

Inflation trajectory: Prices remain "somewhat elevated" according to the Federal Reserve, with the path back to the 2% target uncertain.

Rate outlook: Fed officials are divided on the need for further rate cuts, with seven projecting no reductions in 2026 while others see two or more.

Warning Signs to Watch

Several indicators merit close attention in early 2026:

  • Credit card delinquencies: Already rising, further increases could signal consumer stress.
  • Savings rate: The personal savings rate has declined significantly from pandemic peaks; further erosion would be concerning.
  • Retail earnings: First-quarter results will reveal whether holiday strength was borrowed from future spending.
  • Tariff implementation: Any escalation of trade tensions could accelerate the squeeze on household budgets.

The Bottom Line

The U.S. economy enters 2026 in a peculiar position: strong by historical measures, yet fragile in ways that traditional metrics may not fully capture. The consumer has carried the economy through 2025, but the K-shaped divide suggests this burden is falling increasingly on those with the means to sustain it.

For policymakers, the challenge is addressing inflation without crushing the spending that keeps the economy afloat. For investors, the question is whether market-driven wealth effects can continue offsetting fundamental headwinds. And for average Americans, the hope is that 2026 brings broader prosperity rather than an economy that works for some while leaving others behind.