Why are Consumers Still Spending?

High household debt isn’t slowing down American Consumer Spending.

U.S. households are facing a perplexing reality: steep increases in spending across the board, even as inflation remains high and consumer debt hits record highs. What’s driving this seemingly contradictory behavior? The answer lies in a combination of unparalleled wealth for the affluent consumers and deeply ingrained spending habits for the majority who are living paycheck to paycheck.

While increasing numbers of Americans are employed and earning higher incomes, the reality for many households is a diminishing real purchasing power. Wage growth is persistently outpaced by inflation, forcing this consumer demographic to bridge the gap by relying on borrowing to maintain their post-COVID spending habits — a “bad habit” that could quickly become a crisis.

This reliance on debt, coupled with plunging consumer sentiment and the reality of high-profile layoffs, signals that the “rainy day” is fast approaching. Retailers who fail to offer genuine value (either through price or uniqueness) will face severe sales and profitability declines. Absent a major correction — the “GLP-1 equivalent” to break the spending addiction — this era of high debt and zero savings is setting the vast majority of U.S. households up for a difficult, and unavoidable, reckoning.

In the meantime, the stage is set for a robust 2025 holiday shopping season. This past week, the National Retail Federation estimated that holiday sales will reach a record high, surpassing $1 trillion. NRF President and CEO Matthew Shay said U.S. consumers “may be cautious in sentiment, yet remain fundamentally strong and continue to drive U.S. economic activity.” Shay said the NRF remains “bullish about the holiday shopping season and expects that consumers will continue to seek savings in non-essential categories to be able to spend on gifts for loved ones.”

Higher-income Households

Record-breaking wealth of the affluent is fueled by several factors, the first being soaring financial assets. The stock market, particularly indices dominated by tech giants such as Microsoft, Apple, Nvidia, and Oracle, has performed exceptionally well. 

As a result, a “Rich-Get-Richer” dynamic has emerged. When the stock market (e.g., the Dow, S&P 500, NASDAQ) sees significant gains, as has happened over the past few years, the wealth of the affluent consumer segment grows. These gains often take the form of unrealized capital gains (the assets haven’t been sold yet), but they create a “wealth effect,” making the affluent feel secure and comfortable, increasing their spending.

Larger bonuses are also filling the affluent segment’s pockets. The re-emergence of initial public offerings (IPOs) and increased private equity activity is leading to expectations of much larger bonuses on Wall Street, further bolstering the spending power of high-income earners.

Dow Jones Index

Aside from stocks, richer households are more heavily invested in higher-yielding assets such as private businesses, and less in low-yielding assets like cash. This leads to a cycle where high-wealth households receive higher rates of return on their wealth. And for the very top, private business equity often forms a significant portion of their net worth, which grows with general economic expansion and entrepreneurial success.

Bottom line: the wealthiest Americans are substantially richer, feeling incredibly comfortable spending more than ever. Subsequently, they are responsible for more than half of all consumer spending.

The More Precarious Majority

These are households that are living paycheck to paycheck, which some economists say is about 60 to 70 percent of the population. They are trapped in a post-COVID spending pattern. Many became accustomed to higher spending during the pandemic when they had extra stimulus-fueled savings. According to government data, 476 million payments totalling $814 billion in financial relief were made to households impacted by the pandemic.

Meanwhile, household debt continued to soar, as illustrated by this chart from the Federal Reserve Board of New York:

Even with those stimulus-fueled savings fully depleted now, consumers have fallen into a “bad habit” of spending every last dime, regardless of the higher prices and record-high and growing consumer debt. Just as GLP-1 drugs address obesity that consumers couldn’t manage on their own, a major external force — the equivalent of a “GLP-1” for spending — will be necessary to break this dangerous cycle of increasingly high debt and zero savings.

Employment and Income Support: The Spending Paradox

Another factor underpinning this bifurcated economy is that more people are working, but wage growth is struggling to keep pace with inflation, exacerbating the split between the affluent and the paycheck-to-paycheck majority. And while it is true that more Americans are working and earning higher incomes than ever before, there is a declining trend in participation is looming on the horizon.

Total Labor Force: The U.S. civilian labor force has grown over the last decade, reaching a record high of over 170 million civilians in early 2025.

Slowing Growth Rate: While the size of the labor force has increased, the average annual labor force growth has slowed significantly in recent business cycles (averaging about 0.55% annually since 2007), largely due to demographic changes like the aging population.

Labor Force Participation Rate: The overall labor force participation rate has trended downward over the past two decades. This suggests that while the total number of workers has increased with population growth, the share of the working-age population engaged in the labor market is shrinking.

Economic Storm Clouds Ahead?

Despite the current spending data, several significant indicators suggest the situation is becoming unsustainable for the average consumer, and a downturn may be imminent. Here are some of the warning signs:

Collapsing Consumer Sentiment: Consumer sentiment has plummeted recently. For the 70% who are not wealthy, this signals they are beginning to “feel poor” and will soon reduce spending, even if the data doesn’t yet reflect it. [Go deeper: Read more about plunging consumer sentiment, HERE.]

High-Profile Layoffs: Large corporations are announcing thousands ( often tens of thousands) of layoffs, often involving high-paying, six-figure jobs. This, coupled with the recent government shutdown, is contributing to a sense of instability.

The Debt Reckoning: With consumer debt at an all-time high and little to no savings, these households are extremely vulnerable. When the “chickens come home to roost,” the resulting financial distress could be severe.

A Retailer’s Strategy: Value and Uniqueness

In a market defined by this spending bifurcation and collapsing sentiment, retailers must adapt their strategies to appeal to both ends of the economic spectrum. The focus must shift to value or uniqueness.

Consumer Group	Defining Need	Winning Retail Strategy	Examples of Winning Retailers
Price-Sensitive Majority	Price-Value (Best price for good stuff)	Offer low, clear prices and quality merchandise.	Walmart, Costco, TJX, Ross, Burlington
Affluent/Younger Consumers	Unique Value (On-trend, aspirational products)	Focus on unique, leading-edge fashion and “mind share.”	American Eagle, Abercrombie & Fitch, Boot Barn, Sephora, Bath & Body Works, Dick’s Sporting Goods

Retailers with less-than-pristine balance sheets who offer “nothing special” are predicted to face a very difficult situation as lenders scrutinize finances in the new year. As sentiment collapses, most consumers will shop less and buy less, making differentiation and strong financials critical for survival.