Consumer spending serves as the backbone of the U.S. economy, representing approximately two-thirds of total economic activity. When consumers feel financially stable and confident, they tend to increase their spending, which in turn supports corporate earnings and broader economic expansion. When uncertainty rises, spending can pull back. In practice, consumer behavior is shaped by a wide range of factors, and not all consumers respond in the same way. For this reason, a comprehensive understanding of consumer financial health is among the most valuable tools available to long-term investors trying to make sense of the current environment.

The current picture is positive but nuanced. On the encouraging side, household net worth is near record levels, labor market conditions have improved, retail sales remain strong, and gasoline prices are trending lower. At the same time, consumer sentiment is hovering near historic lows, savings rates have dropped sharply, debt levels remain elevated, and inflation continues to exceed the Federal Reserve's target.

These conflicting signals point to an economy that is broadly performing well, while also leaving certain households feeling financially strained. For long-term investors, appreciating both dimensions of this picture is essential for understanding economic trends and the value of adhering to a well-constructed financial plan.

Consumer Pessimism Persists Even as Economic Growth Remains Healthy

The University of Michigan Surveys of Consumers reported a consumer sentiment index reading of 49.5 in June 2026, significantly below the historical average of 83.8. This places current sentiment near its all-time low, reaching levels comparable to those observed during the depths of the 2008 financial crisis and the early stages of the pandemic. One-year inflation expectations from the same survey have risen to 4.6%, indicating that concerns about the cost of living remain a central driver of consumer pessimism.¹

Although one might expect a direct link between how consumers feel and how much they spend, that relationship is not always straightforward. Consumer sentiment data is based on representative surveys, which can present measurement challenges, and there can be a meaningful gap between how people describe their mood and how they actually behave. As a case in point, retail sales have grown 6.9% year-over-year in the most recent report, well above the long-term historical average of 4.7%.²

What accounts for this divergence? A significant part of the explanation lies in the inflation consumers have endured over the past several years. Even though the pace of inflation has moderated, the overall price level for everyday goods and services remains substantially higher than it was before the pandemic. Households feeling the ongoing burden of elevated grocery, housing, and energy costs may express pessimism in surveys while still spending on necessities and some discretionary items.

The labor market, while showing signs of improvement, also carries uncertainty tied to the potential effects of artificial intelligence on employment. Wage growth has moderated, though it remains at a historically solid annual rate of 3.6%. The challenge is that this figure falls short of recent inflation readings driven by energy prices. These wide-ranging concerns may influence how households think about the future, even as they continue to make day-to-day purchases.

Household Net Worth Reflects the Underlying Strength of the Economy and Financial Markets

Despite subdued sentiment, the aggregate balance sheet of American households has reached unprecedented strength. Total U.S. household net worth climbed to $183 trillion in the first quarter of 2026, a record high. Financial assets, including equities and retirement accounts, have expanded considerably over the current market cycle. Non-financial assets, particularly residential real estate, have also appreciated meaningfully over recent years.³

Of course, this aggregate figure masks significant variation across income and wealth levels. A widely used term at present is the "K-shaped" economy. Households with substantial exposure to financial assets and real estate have seen their balance sheets grow considerably stronger. For those without such assets, wage growth has been robust, yet these households may also be contending with higher debt burdens, which have been rising steadily at the national level. This includes credit card debt climbing to $1.3 trillion, auto loans reaching $1.7 trillion, and student loan balances also rising to $1.7 trillion.⁴

The wealth effect, which describes the tendency for consumers to increase spending when they feel wealthier, helps explain why aggregate spending has held up even as sentiment has weakened. This dynamic carries different implications depending on the lens through which it is viewed. For the overall health of the economy, it is preferable for financial gains to be broadly distributed across the population. For markets and portfolios, what matters most is the trajectory of corporate earnings growth. So while certain population segments may face financial headwinds, this does not necessarily translate into a concern for investors.

Personal savings rates have trended lower

The personal savings rate, which captures the share of after-tax disposable income that households set aside, has fallen to 3.0%, well below the historical average of 6.2%. Through much of the 20th century, this rate was considerably higher, averaging 11.1% from 1960 to 1990. Today's level also represents a sharp reversal from the pandemic era, when the savings rate briefly surged above 30% as households received government support and had limited outlets for spending.⁵

The drivers of this decline are once again tied to inflation and energy prices. Sustained consumer spending has meant that the average household is allocating more of its income toward purchases rather than savings. Higher prices for necessities, including gasoline, also reduce the portion of each paycheck available to set aside. Demographic trends are another contributing factor. As the Baby Boomer generation moves deeper into retirement, savings rates will naturally decline as retirees draw down accumulated wealth. These population shifts help explain why the savings rate has trended lower over recent decades.

A savings rate of just 3.0% may leave some households with limited financial cushions against unexpected expenses or life events. From a financial planning standpoint, this is an area that warrants attention. For long-term investors, the power of compounding means that dollars set aside early in a financial plan can grow substantially over decades.

Looking at the broader picture, a number of trends are moving in a favorable direction. Oil prices have retreated from recent highs, which could provide some relief on the inflation front and help ease the pressure that has weighed on consumer confidence. The labor market has also shown improvement in hiring activity, and the unemployment rate remains low. These are encouraging developments for household finances and for the broader consumer outlook.

Summary

Consumer spending has remained resilient overall, continuing to support the economy and financial markets despite a range of mixed signals. For investors, this reinforces both the importance of building a sound financial plan and maintaining focus on longer-term trends.

References & Sources

1. https://www.sca.isr.umich.edu

2. https://www.census.gov/retail/sales.html

3. https://www.federalreserve.gov/releases/z1

4. https://www.federalreserve.gov/econres/scfindex.htm

5. https://www.bea.gov/data/income-saving/personal-saving-rate