How does consumer spending impact economic growth?

Consumer spending remains a powerful U.S. growth driver

Robust consumer spending growth continues to energize both economic expansion and corporate earnings, with higher-income consumers contributing the greatest lift. Because consumer activity represents nearly two-thirds of U.S. economic output, it remains one of the most important signals for investors. ¹ Jobs, incomes, and rising asset prices continue to shape household financial health in meaningful ways.

Wage growth and historically low layoffs have helped counter slower hiring in recent months. “Weekly jobless claims remain low and wages stable, based on U.S. Treasury income tax withholdings,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management Group. Even with government shutdown delays in data releases, average hourly earnings rose 3.8% in 2025 – well above the 2.7% inflation rate – allowing incomes to outpace living costs despite slowing wage gains among lower-income workers. ²

Tariff developments have also influenced spending patterns. Recent tariff hikes on imports from major trading partners caused only modest increases in core goods prices. President Donald Trump has announced and postponed multiple tariff plans, and while the effective tariff rate approached 12% in late-2025, estimates suggest it could climb toward 14.4%, depending on consumer behavior and negotiation outcomes. ³

Key indicators of consumer spending strength

High-frequency economic indicators continue to reflect a stable and resilient consumer sector. Investors increasingly rely on these real-time measures, especially during periods when official government reporting slows. Bill Merz, head of capital markets research at U.S. Bank Asset Management Group, notes that “consumer spending proxies such retail sales, credit and debit card swipes, restaurant bookings, and daily tax withholding statistics suggest aggregate consumer behavior remains solid.”

Transportation-related indicators help confirm that trend. Trucking demand, and courier activity remain solid and rail activity fits normal seasonal patterns. These data points reinforce the traditional data that suggests underlying consumer demand remains normal.

Consumer sentiment has been more mixed, even though spending remains steady. The University of Michigan’s Index of Consumer Sentiment dipped near all-time lows in early November before modestly rebounding as 2026 began. Political views, tariff concerns, and temporary shutdown-related uncertainty contributed to the decline, though sentiment trends appear less reflective of the higher-income households driving spending growth. ⁴

Debt dynamics and household balance sheets

Consumer debt continues to rise but at a slower and more manageable pace. Household credit grew 3.6% in the third quarter compared to last year, slightly below long-term average. ⁵ This trend suggests that incomes – not rising debt – are fueling spending growth.

Credit card balances have increased more noticeably, climbing 5.8% year-over-year. ⁵ Even so, broader debt growth still trails overall spending, reinforcing the view that household finances remain relatively healthy. “A key to consumers maintaining healthy balance sheets is that income growth outpaces inflation,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. He notes that nominal wages continue to exceed the cost of living, despite slower progress for lower income households.

Policy implications of a shifting labor market

Labor market data has shown mixed results as job creation slowed in the second half of 2025. The Bureau of Labor Statistics paused non-farm payroll reporting during the government shutdown, but earlier revisions also pointed to softer hiring momentum. December added 50,000 jobs and November 56,000 jobs, following a significant October loss of 173,000 jobs as the labor market emerged from federal government shutdown disruptions. Multiple Federal Reserve regional banks estimate fewer job gains may still keep the unemployment rate stable due to a lower supply of labor resulting from immigration policies and an aging demographic. ⁶

Even with slower hiring, job losses remain limited. Weekly jobless claims continue to sit near historical lows, indicating companies are cautious about letting workers go. ⁷ However, companies appear more conservative with new hiring as they navigate interest rate changes, tariffs, and shifting consumer demand.

The Federal Reserve (Fed) cut interest rates in September, October and December, with markets expecting additional cuts by the end of 2026. ⁸ Policymakers continue to balance inflation risks – potentially influenced by higher tariffs – against signs of labor market cooling. These rate decisions directly affect consumers by shaping borrowing costs for mortgages, auto loans, and credit cards.

Market performance and outlook

The stock market has begun to reflect these cross-currents. S&P 500 consumer discretionary stocks underperformed the broader index, rising only 0.7% in the fourth quarter and 6% for all of 2025. ⁹ This contrasts sharply with strong gains of 42% in 2023 and 30% in 2024. ⁶ High interest rates and slowing job creation have both weighed on valuations.

Even so, consumer health remains a central anchor in our constructive outlook for 2026. Solid spending, low jobless claims, and steady wage growth continue to support strong corporate fundamentals. These dynamics contribute to our preference for global equities within diversified portfolios. As always, consult with your wealth planning professional to ensure your strategy reflects both current market conditions and long-term goals.

FAQs

How much does consumer spending affect the economy?

Consumer spending drives the economy. In 2025’s third quarter, personal consumption expenditures made up 69% of the U.S. Gross Domestic Product (U.S. Bureau of Economic Analysis). This figure shows that consumers play a decisive role in whether the U.S. economy is growing or shrinking.

Are consumers spending too much?

Consumers continue to take on more debt but rising wages and improved savings help balance the situation. As of September 30, 2025, consumer debt reached $18.6 trillion (Federal Reserve Bank of New York), yet household debt remains manageable. The U.S. Federal Reserve reports that household debt payments equal about 11.3% of disposable income in the 3^rd quarter of 2025, which is still below the 15.9% peak seen in 2007.