How consumer spending supports U.S. economic growth

Consumer spending powers the U.S. economy and represents about two-thirds of total economic activity. ¹ Household purchases generate business revenue, sustain jobs and encourage investment, linking everyday buying decisions to the pace of economic growth. Spending on essentials such as housing, food and energy provides a stable base, while travel, dining and entertainment offer a clearer view of households’ financial flexibility.

Consumer spending and U.S. economic growth

Income, wealth and essential expenses shape how households spend. Higher-income households provide a large share of overall demand, while many lower- and middle-income consumers compare prices more closely and prioritize necessities. Despite high borrowing costs, geopolitical uncertainty and historically weak confidence, total spending keeps growing.

“Steady income growth and a stable labor market are sustaining consumer spending,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. Low layoffs and rising pay give many households room to keep buying goods and services. Slower hiring and higher living costs create headwinds, but current data do not signal a broad pullback.

August retail sales show resilient U.S. consumer demand

U.S. retail and food services sales rose 1.2% in August 2026 from July and 6.0% from a year earlier. ² Sales from June through August rose 6.0% from the same period in 2025, while the Census Bureau revised July’s monthly decline to 0.5% from a decline of 0.6%. The figures include price changes, so they measure dollars spent rather than the inflation-adjusted purchase volume of goods and services.

Most major categories posted gains in August. Online and other non-store retailers rose 2.6%, gasoline stations gained 3.1%, and restaurants and bars increased 1.2% from July. Building material and garden equipment dealers declined 0.2%, showing that households still distinguish among purchases even during a strong month.

The rebound shows consumers are still spending while shifting dollars toward convenience, services and categories affected by higher prices. Those choices can produce sharp differences in sales and profits across industries, even when overall demand remains healthy. Investors should therefore pair the headline total with category trends and company-level results.

Frequent spending indicators add context to retail sales

More frequent measures can show changes in demand before monthly government reports arrive. “Retail sales data, point-of-sales readings and restaurant bookings show that consumer activity remains solid,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. Each measure offers timely information but captures only part of household spending.

These frequent readings complement rather than replace official retail sales data. Used together, they help separate a brief monthly swing from a broader change in household demand. August’s strong gain and positive annual growth point to resilient consumer spending, while differences among categories still call for careful analysis.

Higher prices strain household purchasing power

Rising costs for energy, food, housing and insurance can quickly reshape household budgets because consumers have limited ability to avoid these expenses. When essential prices grow faster than income, families often reduce optional purchases first. Persistent inflation can also influence Federal Reserve (Fed) interest rate decisions and keep borrowing costs elevated.

Wage gains, savings and stable employment have helped households manage higher costs. Those financial resources vary widely by income, so overall spending can rise even as many families face tighter budgets. A fuller view compares necessities, optional purchases and spending patterns across income groups.

Consumers have not broadly reduced spending as essential costs have risen. Many households have adjusted by seeking value, switching brands or delaying purchases rather than stopping them entirely. A sustained period in which prices outpace pay would pose a greater risk, especially for households with limited savings or variable-rate debt.

Consumer sentiment weakens as inflation expectations rise

The University of Michigan’s Consumer Sentiment Index fell to 48.1 in September from 51.7 in August, its lowest reading in four months. ³ The index stood 12.7% below its September 2025 level as views of current conditions and future expectations weakened. Consumers also reported growing concern about high prices and their personal finances, even as retail sales remained firm.

Year-ahead inflation expectations rose to 4.6% in September from 4.0% in August, the highest reading since June. ³ Long-run inflation expectations edged up to 3.4% after three months at 3.3%. Expectations for higher inflation can prompt some consumers to buy sooner, but they can also weaken confidence and future spending plans.

Sentiment surveys and spending reports measure different parts of the consumer outlook. Surveys record how people assess prices, jobs and future conditions, while retail and transaction data show what households actually buy. September readings describe cautious consumers who are still spending, so investors should monitor confidence and behavior together.

Household debt remains manageable but pressure varies

Total U.S. household debt edged down $13 billion, or 0.1%, to $18.8 trillion in the second quarter of 2026. ⁴ Mortgage balances declined to $13.1 trillion, while home equity line balances rose to $459 billion. The small decrease indicates households did not broadly accelerate borrowing during the quarter, but monthly payment burdens remain the more useful gauge of spending pressure.

Aggregate delinquency rates improved slightly, although 4.7% of outstanding debt remained in some stage of delinquency. ⁴ Higher interest rates raise monthly costs for people who carry credit card balances or use loans with variable rates. Stable income helps offset those costs, but households with limited savings have less room for unexpected expenses.

“Households are better positioned to maintain healthy balance sheets when income grows faster than inflation,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. Wage growth remains positive, although lower-income households devote more of their budgets to necessities and often encounter price increases sooner. Income growth and manageable monthly payments can preserve financial flexibility even when borrowing costs stay high.

Labor market stability supports consumer spending

The labor market continues to sustain consumer spending even as hiring becomes less consistent. Employers added 162,000 jobs in August, and the unemployment rate held at 4.1%. ¹ Gains in restaurants and local government education offset job losses in the information sector.

Weekly unemployment claims still indicate limited layoffs. Initial claims fell to 197,000 in the week ended September 19, while the four-week average declined to 202,250. ¹ Low claims help preserve household income and spending, although a sustained increase would signal weaker labor market conditions.

Average hourly earnings rose 3.1% over the 12 months through August, adding to household income even as wage growth slowed from July. ¹ Inflation-adjusted hourly earnings declined 0.3% from a year earlier, which shows why many consumers remain sensitive to prices. “Income growth continues to stabilize consumer spending as the labor market moves toward better balance,” says Hainlin.

Federal Reserve policy will influence the next stage of the consumer cycle. Interest rates shape monthly payments for mortgages, auto loans, credit cards and other debt, which can make households more selective. Steady income growth and low layoffs remain favorable, but investors should track claims, wages, inflation and spending together as conditions change.

What resilient consumer spending means for investors

Markets are weighing resilient spending against slower wage growth, weak sentiment and high borrowing costs. Stable household demand can sustain corporate revenue and extend the economic expansion, although consumer-oriented companies may not move in step with the broader equity market. Results will differ based on customer income, pricing power and exposure to optional purchases.

Consumer behavior connects employment, inflation and business earnings. Strong August retail sales, low layoffs and continued wage gains point to a constructive outlook, while weak sentiment and uneven debt pressure argue for selectivity. Companies with durable demand, sound balance sheets and clear value propositions may be better positioned than businesses that depend heavily on discretionary purchases.

For long-term investors, the consumer outlook supports a constructive and disciplined approach. Spending remains resilient, but results vary across sectors, income groups and companies as inflation and borrowing costs shape household choices. Terry Sandven, chief equity strategist for U.S. Bank Asset Management Group, says, “The durability of consumer spending remains a key reason the broader economic outlook stays constructive.”

As always, investors should work with their wealth planning professional to ensure portfolios align with both current economic conditions and long‑term financial goals.

FAQs

Why is consumer spending important to U.S. economic growth?

Consumer spending matters because it makes up approximately two‑thirds of U.S. economic activity and often drives short‑term economic growth. ¹ It includes everyday purchases of goods and services, and government agencies track it closely as a key part of gross domestic product and as an early gauge of economic strength. When consumer spending holds up, it supports business revenue and hiring, which can help the economy keep expanding.

What do current retail sales trends say about consumer demand?

Retail sales trends suggest consumer demand remains steady overall. The Census Bureau reported that retail and food services sales rose 1.2% in August, 6.0% above their year-ago level. ² The Census Bureau revised July’s monthly change to a smaller 0.5% decline, and the August rebound suggests households continue to spend even as results vary across retail categories.

Is rising household debt a risk to consumer spending?

Rising household debt can be a risk to consumer spending, but the impact depends on whether payments strain monthly budgets. Recent Federal Reserve Bank of New York data shows household debt declined 0.1% in the second quarter of 2026, with credit card balances increasing alongside other categories. ⁴ Even so, broader measures that compare debt with income have remained relatively low by historical standards, which suggests many households still have capacity before debt becomes a widespread spending constraint.