The 2026 Consumer Conundrum: Holiday Strength vs. Underlying Fragility

The consumer story is one of stark contradiction. On one side, holiday spending data shows surprising resilience. Preliminary Visa and Mastercard data indicates U.S. retail sales grew in November and December. On the other, the underlying financial picture is one of stress. The University of Michigan Consumer Sentiment Index plunged to , reflecting a sharp deterioration in household outlooks. This is the holiday paradox: strong nominal spending masking fragile financial health.

The resilience is being fueled by record debt. Total household debt hit a new high of , . This leverage is the buffer allowing spending to continue. Yet it is a precarious one. While aggregate debt payments remain a manageable , the composition is shifting. Credit card balances, a key tool for funding consumption, , and delinquency rates are ticking up. Consumers are borrowing to get by, a pattern that cannot be sustained indefinitely.

This fragile setup is now facing a softening labor market. Goldman Sachs Research forecasts that slower job growth and elevated inflation will weigh on income growth in Q4. , down from 2.4% in 2024. For households already stretched, this weakening income stream is the primary threat to the current spending trajectory. The consumer is not overspending; it is trying to muscle through, but the financial foundation is eroding.

The bottom line is that the current consumer strength is a function of accumulated debt and temporary buffers, not a robust underlying economy. The holiday spending numbers are a lagging indicator of past financial flexibility. The forward path is one of increasing pressure, as the softening labor market begins to bite and the limits of household leverage become clearer.

The Financial Engine: Debt, Income, and the Wealth Effect

The resilience of the U.S. consumer is built on a foundation of record debt and a wealth effect, but it is showing signs of strain. The financial engine that has powered spending is now running on elevated fuel, with credit card balances at a high and the flow of new accounts into serious delinquency at . This elevated delinquency rate, while stable from the previous quarter, signals that the pressure on household balance sheets is intensifying. It is a key vulnerability, as it erodes the equity cushion that has allowed consumers to service their debts.

This pressure is compounded by a slowdown in the income stream. Real personal consumption expenditures were flat in September, with spending on goods actually declining. More broadly, Goldman Sachs Research forecasts that real income growth will soften to , a notable deceleration from the previous year. , the near-term trajectory points to weaker growth in the purchasing power that underpins consumption.

Yet, the household balance sheet remains strong, propped up by asset prices. The net worth-to-disposable personal income ratio has held near its all-time high, driven by gains in equity markets. This wealth effect has been a critical offset, allowing consumers to borrow against rising home and stock values. However, it creates a fragile setup: consumption is supported by a balance sheet that is highly sensitive to market volatility. If equity prices retreat, that key pillar of financial health would weaken, directly threatening the ability to service the growing debt load.

The bottom line is a consumer caught between two forces. On one side, income growth is slowing, and delinquency pressures are mounting. On the other, a wealth effect provides a buffer. The system can hold as long as asset prices remain stable and the income recovery materializes. But the elevated credit card delinquency flow is a clear warning that the margin for error is narrowing.

The 2026 Catalysts: Policy Tailwinds and Structural Headwinds

The macroeconomic setup for 2026 is defined by a clear tension between powerful policy-driven growth and persistent inflationary pressures. On one side, Goldman Sachs projects the U.S. economy will accelerate, forecasting for the year. This optimism is built on three fading headwinds: the tariff drag that cut growth in 2025 is expected to fade, new tax cuts from the will provide a fiscal boost, and the Federal Reserve's easing cycle will bring more favorable financial conditions. On the other side, core inflation remains stubbornly elevated at , with tariff pass-through identified as a key contributor.

This creates a dual narrative for consumption. The policy tailwinds aim to support spending by increasing disposable income and lowering borrowing costs. , driven by tax refunds and a cooling inflationary environment. However, the structural headwind of elevated prices, particularly goods, continues to pressure affordability. The Federal Reserve, recognizing the downside risks to employment, has already cut rates, with its target range now at . The committee's stated aim is to support maximum employment amid rising risks, but it remains vigilant for any resurgence in inflation.

The bottom line is a fragile equilibrium. The projected acceleration in GDP growth depends on the tariff and tax effects materializing while inflation cools. Yet, , the path to a sustained re-rating of consumer spending is not guaranteed. The Fed's accommodative stance provides a floor, but persistent price pressures will continue to test household budgets and limit the full force of the policy tailwinds.

Catalysts and Risks: What to Watch in 2026

The consumer's resilience in 2025 is a story of strong balance sheets and wealth gains masking underlying stress. For 2026, the setup is one of fragile equilibrium. The primary risk is a crack in the income stream, which would quickly translate into higher delinquencies. The leading indicators are already flashing caution.

The most telling data point is the flow into serious delinquency. While overall delinquency rates stabilized, the quarterly transition rates reveal where stress is building. For credit cards, the flow into serious delinquency was in Q3. For student loans, . These are not just elevated levels; they are the leading edge of a potential wave. A sustained increase in these flows would signal that the consumer's ability to absorb higher payments is weakening, directly challenging the stability of household debt.

The income foundation is the primary vulnerability. Job growth has slowed, and the unemployment rate has edged up to . Goldman Sachs forecasts that slower job growth will weigh on income growth in Q4 2025, . The path to recovery hinges on a pickup in job growth next year, . Any deviation from that trajectory would be a major headwind.

Inflation remains a persistent pressure. Core PCE inflation rose to in September, driven significantly by tariff pass-through. The Federal Reserve has signaled it will be attentive to risks to its , with downside risks to employment judged to have risen. A resurgence in core PCE above 2.8% would challenge the Fed's path and further erode consumer affordability, especially if wage growth fails to keep pace.

The forward-looking framework is clear. Watch the flow into serious delinquency for credit cards and student loans as the primary stress indicator. Monitor the pace of job growth and the unemployment rate for signs of a weakening income foundation. Track core PCE inflation for any resurgence that would challenge the Fed's policy path and consumer purchasing power. The consumer's resilience in 2026 will be determined by which of these three pressures gains the upper hand.