The State of the U.S. Consumer
Consumer attitudes remained subdued in late 2025, even as spending continued at a solid pace heading into the holiday season. The University of Michigan’s Index of Consumer Sentiment registered 51.0 in November, with December’s reading rising to 52.9, the first improvement in five months. Although sentiment remains 28% below December 2024’s reading of 74.0, the data continues to show a picture of a consumer who is cautious in mood but resilient in behavior.
Why Sentiment Remains Depressed
Joanne Hsu, director of the Surveys of Consumers, notes that households continue to report concerns about price levels, income volatility, and broader economic uncertainty. While inflation has eased from its peak, consumers remain sensitive to cumulative price increases for essentials like food and housing. Job-market anxiety also plays a role. More than half of employed respondents worry about losing their job, and many believe it would take months to find equivalent employment amid steady corporate layoff announcements.
However, the recent sentiment improvement was driven by a 13% rise in projected future personal finances among younger consumers. Inflation expectations are also moderating, with short-term expectations easing to 4.1% in December, down from 4.5% in November.
The K-Shaped Economy: A Tale of Two Consumers
The resilience in aggregate spending masks a significant divide by income level. The U.S. economy is experiencing a “K-shaped” dynamic where affluent households spend robustly while others face financial pressure.
In November 2025, retail sales rose 4.53% year-over-year, and the National Retail Federation forecasts holiday sales will surpass $1 trillion. A key driver of this resilience is the continued strength in e-commerce, which has grown faster than in-store sales this holiday season. However, category performance is highly uneven. Essentials like groceries and health products are seeing steady demand, while discretionary categories such as furniture and home improvement have softened as lower-income households prioritize necessities.
This spending is increasingly bifurcated. According to research from McKinsey, lower- and middle-income consumers are trading down to lower-cost brands and reducing discretionary purchases. In contrast, higher-income households—buoyed by strong stock market gains in 2025—have maintained or increased spending on experiences and luxury goods. This divergence is most visible in premium travel and experiential luxury. While mass-market discretionary spending struggles, high-end categories are thriving.
Outlook for 2026
Improving sentiment suggests reason for confidence ahead. Inflation expectations have dropped to their lowest level since January 2025, real wages remain positive, and the labor market remains historically resilient.
The K-shaped nature of the economy has created pockets of exceptional strength among affluent consumers, even as others pull back. As we head into 2026, the key dynamic to watch will be whether improving economic fundamentals, like easing inflation and persistent wage growth, can bridge this divide.
