5 economic signals suggest U.S. consumers are feeling the strain

For over two years, the American consumer has been the economy's unlikely hero. Despite inflation that eroded purchasing power, interest rates that made borrowing expensive, and endless predictions of a coming recession, spending kept climbing. Corporate earnings rose. The stock market hit record after record. By most headline metrics, the economy looked fine.

But the strain has been building underneath those headlines, and five key economic signals now suggest that the consumer engine that powers roughly 70 percent of U.S. economic activity may be starting to sputter.

The first signal is real income. After adjusting for inflation, household income has fallen more than 1 percent over the past year, according to PNC chief economist Gus Faucher. That kind of decline is normally associated with recession, not expansion. The Consumer Price Index and the Personal Consumption Expenditures price index both confirm the same story: prices are rising faster than wages for millions of American households. For low- and middle-income families, the math is particularly brutal because they spend a disproportionate share of their income on essentials like gas, groceries, and rent, the categories where inflation has been most persistent.

The second signal is credit card debt. Americans now owe over .3 trillion on credit cards, a record high. More concerning than the total is the delinquency rate, which has been climbing steadily. The New York Federal Reserve reported that serious delinquencies on credit cards rose to their highest level in over a decade in the most recent quarter. This is not a sign of confident consumers using credit strategically. It is a sign of households bridging the gap between their income and their cost of living with debt that is becoming harder to repay.

The third signal is the savings buffer. During the pandemic, government stimulus payments and reduced spending created a significant savings cushion. The San Francisco Federal Reserve estimated that excess savings peaked at around .1 trillion in August 2021. By early 2024, that buffer had been largely exhausted. Millions of households no longer have the emergency reserves that helped sustain spending through previous economic shocks. When the next unexpected expense arrives, whether a car repair or a medical bill, the options are increasingly limited: borrow more, or cut back.

The fourth signal is energy prices. The ongoing conflict in the Middle East has pushed oil and gasoline prices higher, and the effects ripple far beyond the gas pump. As Primerica CEO Glenn Williams noted, gas is not discretionary spending for most families; it is how they get to work and take care of their families. Higher energy costs also feed into the cost of transporting virtually every consumer good, creating a secondary inflationary pressure that compounds the primary one. Every dollar spent on gas is a dollar not spent at a restaurant, a clothing store, or a home improvement project.

The fifth signal is GDP growth. The U.S. economy expanded at just a 1.6 percent annual pace in the first quarter, well below the trend needed to sustain rising living standards. Consumer spending contributed to that growth, but at a decelerating rate. If households pull back further, the already modest growth rate could tip toward stagnation.

None of these signals alone would be cause for alarm. Household balance sheets in aggregate remain solid, corporate profits are strong, and the stock market reflects optimism about future earnings. But the distribution matters enormously. The households most vulnerable to inflation and debt stress are precisely the ones whose spending is most essential to keeping the economy moving. High-income households can absorb higher prices without changing behavior. Middle- and lower-income households cannot.

The policy implications are significant. The Federal Reserve under new Chair Kevin Warsh faces a difficult balancing act. Inflation remains above target, arguing for maintaining or even raising rates. But if consumer spending contracts sharply, the economy could slow faster than policymakers expect, making rate cuts necessary before inflation is fully tamed. The bond market is already pricing in a rate hike by next year, but that projection depends on a labor market that stays strong. Friday's jobs report will be a critical data point.

For investors, the consumer strain signals suggest caution in sectors that depend on discretionary spending, from retail to restaurants to travel. Companies serving the high end of the market may continue to perform well, but mass-market brands that rely on middle-income consumers could face headwinds that are not yet reflected in their stock prices.

What This Means For You: If you have been feeling like your paycheck does not go as far as it used to, you are not imagining it. Real household income is declining, credit card debt is at record highs, and the savings buffer that got millions through the pandemic is gone. The practical takeaway is straightforward: if you are carrying credit card debt, make paying it down a priority before rates potentially go higher. If you have savings, keep them liquid rather than tying them up in investments you might need to access quickly. And if you are planning major discretionary spending, consider whether it can wait. The economy is not in crisis, but the margins are thin for a lot of households, and the signals suggest they are getting thinner.