The American consumer—the engine that powers roughly 70% of U.S. economic activity—is showing signs of fatigue. According to a new report from Moody's Ratings, real consumer spending growth is expected to decline to approximately 1.5% in 2026, a notable deceleration that reflects the accumulated toll of years of elevated prices and rising debt burdens.

The Resilience Runs Out

For the past two years, economists have repeatedly predicted that consumer spending would crack under the weight of inflation and higher interest rates. And for two years, American households have defied those predictions, continuing to spend even as their savings dwindled and credit card balances swelled.

But 2026 may be different. The word that best described the consumer in 2025 was "resilient," according to Liz Everett Krisberg, head of the Bank of America Institute. Whether that resilience can continue is now the central question facing the economy.

"The word of the year, and what sets us up for 2026, should be 'resilient,' because that's how the consumer has performed. Though there is a distinct gap between higher-income and lower-income households, spending, wages and income continue to grow for both groups."

— Liz Everett Krisberg, Bank of America Institute

The Spending Hierarchy Shifts

What's changing isn't just how much consumers spend—it's what they spend on. High child care prices and the rising cost of essentials like utilities and property taxes are squeezing discretionary budgets. When rent, groceries, and healthcare take a larger share of income, there's less left for restaurants, travel, and retail purchases.

Essential Costs Squeeze Budgets

McKinsey's ConsumerWise survey reveals the depth of the shift:

  • 43% of consumers now rank inflation as their top financial concern
  • 29% cite tariffs as a major factor shaping spending decisions
  • More than 60% say they have already changed or plan to change buying habits in response to higher costs
  • Most are cutting back on non-essentials or trading down to private labels

The K-Shaped Reality

Consumer spending in America is increasingly two stories, not one. The top third of households by income drive more than half of total consumer spending and remain relatively healthy—spending freely on travel, dining, and premium goods. These households benefit from stock market gains, home equity appreciation, and stable employment.

But a quarter of U.S. households currently live paycheck to paycheck, with little buffer against unexpected expenses. For these consumers, the spending outlook is considerably darker, with many already reducing purchases and accumulating debt to cover essential costs.

Retail Faces a Reality Check

The spending deceleration is already reshaping the retail landscape. Following a holiday season where nominal sales crossed the historic $1 trillion mark, the industry is bracing for a "spending hangover" in 2026.

Value Retailers Gain Share

"Value-focused retailers are poised to gain market share as consumers trade down," according to Moody's analysts. Discount retailers like Dollar General and Dollar Tree have already reported an increase in higher-income shoppers throughout 2025—a reliable indicator of consumer stress.

The trend toward value extends beyond dollar stores. Private-label products, off-price retailers, and discount grocery chains are all benefiting from consumers seeking ways to stretch their budgets.

Specialty Retailers at Risk

PitchBook's 2026 outlook predicts a K-shaped retail economy that deepens the divide between winners and losers. Companies within the AI ecosystem are expected to thrive, while others struggle with "weakened consumer buying power." Forrester predicts specialty retailers will suffer the most as consumers prioritize essentials over discretionary purchases.

Debt Burdens Mount

One reason consumer spending held up despite inflation was credit. Americans charged more to their credit cards, borrowed against their homes, and drew down savings accumulated during the pandemic. But this approach has limits.

Credit card debt has surged past $1.2 trillion, with delinquency rates rising. Auto loan defaults are climbing. For many households, the debt accumulated during the high-inflation years is now coming due, constraining future spending capacity.

What Could Change the Outlook

The 1.5% spending growth forecast isn't destiny. Several factors could shift the trajectory:

Positive Scenarios

  • Faster wage growth: If wages outpace inflation by a wider margin, real purchasing power improves
  • Lower interest rates: Fed rate cuts would reduce debt service costs and potentially boost housing activity
  • Falling energy prices: Lower gasoline and utility costs free up budget for discretionary spending
  • Strong employment: Continued job gains support consumer confidence and income

Negative Scenarios

  • Tariff-driven inflation: New tariffs could push prices higher, further squeezing budgets
  • Labor market weakening: Rising unemployment would directly reduce consumer spending
  • Credit tightening: If lenders pull back, consumers lose a spending safety valve
  • Asset price decline: Stock or housing market drops would reduce wealth effects

The Silver Lining

Despite the deceleration, the outlook isn't uniformly gloomy. Consumer spending is expected to remain the backbone of the U.S. economy even at reduced growth rates. The job market, while cooling, continues to add positions. And wage growth, while moderating, still outpaces inflation for many workers.

Moreover, 96% of global retail executives surveyed by Deloitte expect industry revenues to grow in 2026, with 81% foreseeing margin expansion. Mall traffic has been trending upward, and e-commerce continues to gain share.

What This Means for Your Finances

For individual households navigating this environment, several strategies may help:

  • Prioritize high-interest debt reduction: With credit card rates near record highs, paying down balances provides a guaranteed return
  • Build emergency reserves: A spending slowdown often precedes broader economic weakness
  • Evaluate subscription spending: Recurring charges add up quickly and often escape scrutiny
  • Consider value alternatives: Private labels and discount options often provide comparable quality at lower cost
  • Lock in rates where possible: Fixed-rate debt becomes more attractive if rates decline

The American consumer has defied gravity for longer than most expected. But gravity eventually wins. Whether the landing is soft or hard will depend on how successfully households—and the broader economy—adapt to a lower-growth environment.