Consumer Spending Persists Despite Slower Income Gains

Income Growth Moderates as Spending Holds

The Bureau of Economic Analysis data for December, released Friday (Feb. 20), showd personal income rising 0.3% month over month, while personal consumption expenditures advanced 0.4%. Disposable income, after taxes, matched November’s 0.3% gain. However, wages and salaries expanded just 0.2%, marking the slowest increase since June.

This deceleration in wage growth did not translate into a retrenchment in spending, but it did coincide with notable shifts beneath the surface. Goods spending dipped 0.1% in December, the first decline in six months, while services expenditures jumped 0.7%. Durable goods proved the weakest category, falling 0.3%.

Households are not withdrawing from the economy. They are reallocating. Services, which include housing, healthcare, travel and dining, are absorbing a greater share of wallet, while discretionary goods purchases show signs of constraint.

Two Consumer Economies, Two Financial Realities

Findings from the January Wage to Wallet Index highlight the uneven financial backdrop shaping these decisions. Labor Economy workers, defined as those earning $25 per hour or less, represent more than one in three U.S. employees and drive 15.1% of total U.S. spending, equivalent to more than $1.7 trillion annually.

Yet this cohort’s financial outlook remains guarded. Only 29.4% of Labor Economy workers expect their personal financial situation to improve in 2026, while 27.2% anticipate falling behind financially.

Income expectations help explain the divergence. About half of Labor Economy workers foresee their pay remaining unchanged in 2026, while nearly half expect monthly expenses to rise. Savings projections follow a similar pattern, with nearly one-quarter expecting lower savings balances by year end.

GDP Growth Slows but Remains Positive

Macroeconomic data reinforces this narrative of deceleration without contraction. Real GDP grew at an annualized rate of 1.4% in the fourth quarter of 2025, down sharply from 4.4% in the third quarter. The fourth-quarter reading marked the slowest year-end growth since 2018.

Consumer spending still expanded, rising 2.4% during the quarter, but at a slower pace. Declines in government spending and exports weighed on headline growth, while investment provided partial offset. For the full year, GDP increased 2.2%.

The moderation in growth therefore appears tied less to consumer withdrawal than to a cooling across multiple components. Households remain additive to GDP, though no longer at the brisk rates seen earlier in the year.

Sentiment Improves Slightly

Consumer attitudes, meanwhile, edged higher in February. The University of Michigan’s final sentiment index rose 0.4% from January. Current conditions improved 2.2% month over month, while expectations slipped 0.7%.

Although stability dominated the monthly comparison, absolute levels remain historically subdued. The February reading stands 12.5% below its year-ago level and ranks near the bottom of the survey’s long-term series. Nearly 46% of consumers spontaneously cited high prices as a strain on personal finances, extending a multi-month pattern.

Inflation expectations eased modestly. Year-ahead expectations declined to 3.4%, the lowest since January 2025, while long-run expectations held at 3.3%.

These figures suggest households perceive some moderation in price pressures, even if confidence remains restrained. Consumers are watchful but not fearful, as illustrated by the data.

Credit and BNPL Remain Embedded in Spending Behavior

Against this backdrop, credit usage continues to function as a structural component of household cash-flow management, particularly younger consumers. The February 2026 Pay Later Data Book shows that BNPL usage remains concentrated among younger demographics, particularly bridge millennials and millennials.

In December, 25% of bridge millennials used BNPL, representing a 56% increase from November, even as overall BNPL usage dipped to 14%. Credit card installment plans exhibited similar generational skew, with 42% of bridge millennials using them.

These findings underscore BNPL’s role not as occasional financing, but as recurring budget infrastructure for specific cohorts. Installments are being woven into everyday spending patterns, particularly for consumers navigating tighter income-expense dynamics.