For three years, economists have marveled at the American consumer's resilience. Despite inflation, rising interest rates, and persistent economic uncertainty, households kept spending, powering GDP growth and confounding predictions of recession. But as 2026 begins, cracks are appearing in this foundation that may finally be too significant to ignore.

Late-December retail data revealed a troubling signal: control group sales—the subset of retail spending that feeds directly into GDP calculations—contracted 0.1%, marking the weakest performance in nearly a year. While headline figures initially suggested a resilient holiday season, a deeper analysis reveals concerning trends that could shape the economic landscape throughout 2026.

What the Data Really Shows

The Bureau of Economic Analysis data requires careful interpretation. Top-line retail sales grew modestly in December, but the components that matter most for economic growth told a different story:

  • Control group decline: The 0.1% contraction in control group sales—which excludes autos, gasoline, building materials, and food services—represents the core consumer spending that drives GDP.
  • Downward revision: November data was revised lower, suggesting earlier strength was overstated.
  • Real versus nominal: Adjusting for inflation, real spending growth was even weaker than headline figures suggested.

The timing is particularly concerning. The critical December holiday window typically represents a high-water mark for consumer spending. Weakness during this period often presages broader softening in the months ahead.

The Buy Now, Pay Later Reckoning

One factor that sustained consumer spending through 2025 is now becoming a potential liability. "Buy Now, Pay Later" (BNPL) services reached record usage levels during the holiday season, with platforms like Klarna, Affirm, and Afterpay facilitating billions in purchases.

The BNPL boom allowed consumers to maintain spending even as credit card balances hit record highs and savings rates declined. But those bills are now coming due:

  • January-February payback: BNPL balances accumulated during the holidays must typically be repaid within 4-6 weeks, creating a cash flow crunch for many households.
  • Delinquency concerns: Industry data shows BNPL delinquency rates rising, suggesting that some borrowers overextended during the holidays.
  • Retail ripple effects: If consumers are repaying BNPL obligations, they're not making new purchases, potentially depressing Q1 retail sales.

"Much of the 2025 spending was fueled by 'Buy Now, Pay Later' services, which have reached record levels," noted one retail analyst. "As these balances come due in early 2026, the ripple effect on consumer liquidity could be devastating for retailers."

The K-Shaped Economy Deepens

Perhaps the most significant development of 2025 was the widening gap between consumer segments. The "K-shaped recovery"—where higher-income households thrive while lower-income households struggle—has become a permanent feature of the economic landscape.

Bank of America Institute data illustrates the divide:

  • Higher-income households: Spending growth remains robust, supported by strong asset values (particularly stocks and home equity), job security in professional sectors, and accumulated savings.
  • Lower-income households: Spending has flattened or declined, constrained by depleted pandemic savings, rising essential costs, and limited wage growth.

This bifurcation has significant implications for businesses and investors. Retailers serving affluent consumers—luxury brands, premium grocers, upscale restaurants—continue to perform well. Those targeting budget-conscious shoppers face growing challenges.

As Moody's analysts observed: "Value-focused retailers are poised to gain market share as consumers trade down." Discount chains like Dollar General and Dollar Tree have reported increasing traffic from higher-income shoppers seeking value—a classic late-cycle indicator.

The Tariff Tax on Consumers

Adding to consumer headwinds, tariff costs are increasingly showing up in retail prices. The core PCE price index is projected to rise 3% in 2026 as businesses pass tariff costs through to consumers.

Categories particularly affected include:

  • Electronics: Consumer electronics with significant Chinese manufacturing face price increases.
  • Apparel: Clothing and footwear, heavily dependent on imports, are seeing margin pressure translate to higher prices.
  • Home goods: Furniture, housewares, and home improvement products face similar pressures.

The tariff effect creates a challenging dynamic: consumers face higher prices precisely when their purchasing power is already constrained. This could accelerate the "trade-down" trend and further pressure retailers caught in the middle.

What the Forecasters Expect

Major forecasting institutions have adjusted their consumer spending projections downward:

  • Moody's Ratings: Expects real consumer spending growth to decline to about 1.5% in 2026, down from approximately 2.6% in 2025.
  • Deloitte: Projects real consumer spending at 1.6% for 2026, with unemployment rising to 4.5%.
  • JPMorgan: Forecasts GDP growth of 1.8% for 2026, with consumer spending decelerating in the first half before stabilizing.

These projections don't suggest collapse—they suggest stagnation. A consumer sector growing at 1.5% is not recessionary, but it's not enough to drive robust corporate earnings or justify current market valuations.

Investment Implications

The consumer spending outlook has direct implications for portfolio positioning:

  • Defensive sectors: Consumer staples, utilities, and healthcare tend to outperform when discretionary spending weakens.
  • Selectivity in retail: The bifurcation between premium and value retail argues for selectivity rather than broad sector exposure.
  • Credit quality focus: Consumer credit metrics deserve close monitoring; rising delinquencies could affect financial sector earnings.
  • Inflation hedges: If tariff-driven inflation persists, assets that benefit from rising prices may outperform.

The Silver Linings

Despite the concerning trends, several factors could support consumer spending through 2026:

  • Tax cuts: Provisions from Trump's "One Big Beautiful Bill Act" begin taking effect, potentially boosting after-tax income.
  • Lower energy costs: Oil prices remain subdued, keeping gasoline and heating costs manageable.
  • Wage growth: While decelerating, wages are still growing faster than inflation for many workers.
  • Wealth effect: If stock markets remain stable, higher-income households will continue to feel confident spending.

The Bottom Line

The great consumer retrenchment may finally be arriving. After years of defying expectations, American households are showing signs of strain: weakening holiday sales, record BNPL usage, and a widening K-shaped divide. For investors, the message is clear—the consumer tailwind that powered markets through the post-pandemic period is fading. Positioning for a more selective, defensive environment makes sense as 2026 unfolds.