Why the American Consumer Remains Resilient

Full transcript:

Hello and welcome to this month’s market update for October 2026. My name is Steve Latham. I am the chief investment officer for Bernicke Wealth Management. This month we are going to pivot from talking about fixed income and yields, and we’re going to talk about the primary economic driver of the United States, which is the consumer. The consumer accounts for about 70% of all economic growth year over year.

And if the consumer falters, economic growth is going to slow. And there’s where you normally get a recession. And the consumer has been extraordinarily resilient since COVID. And you can even go all the way back to the great financial crisis to pinpoint how the consumer has driven the economy forward since then. Now, there’s a lot of headwinds these days, and many people that were thinking that the consumer would falter under some of these headwinds. But I’m going to show you today why that’s just not the case, and why the consumer has been so resilient throughout the course of 2026 thus far.

How Consumers Feel vs. What They Spend

Now, the first chart I’m going to show you is we’re really where the consumer how they feel versus what they’re actually doing. And the easiest way to do this is through sentiment data.

So you look at how the consumer feels through taking surveys of them. But then you can look at the hard data, which is how much are they spending year over year on retail sales. So discretionary goods, staples spending so on and so forth. And what you can see is this dark line here real consumer spending. And the real just means net of inflation.

So if the spending was up 5% and inflation was 3%, your real consumer spending is 2%. That is risen steadily since 2022. In fact, there’s barely a blip on there. Consumers have continued to spend year over year, regardless of what the inflationary forces have been going back to 2022. But the light blue line here is the sentiment. So this is how they feel.

And they feel terrible about all this spending that they’ve been doing. I like to call this hate spending where you go out and you want to buy a coffee at Starbucks, but it’s $7. You go out and you have a cocktail, it’s $13, or you go to McDonald’s and you end up spending $15. People are still doing it, but they don’t necessarily like it, and it’s because they feel good about their current position.

Where Spending Is Going in 2026

Now, why do consumers feel good about their position? Well, we can see that they’re continuing to spend as a result of a lot of the wage growth that they’ve had. And we’ll show that in the next slide. But what are they spending on is really the key point here for this slide. And if you go back to the beginning of January 2025 you can see these different categories.

So the dark blue’s discretionary goods, the red is discretionary services, orange is gas, and then green is other necessities. And primarily speaking we’re services driven economy. So we see that the red bar is very pronounced here going back the last year and a half. But what I want to focus on here is the beginning of this year in 2026 for January.

And we can see that all spending has been increasing month over month. And in fact, once we get to April, that’s when the war in Iran started and we saw gas prices increase. Well, a lot of the growth in that spending at the consumer level is a result of these gas prices. Gas has become a significant expenditure for the American consumer, and it has been a couple of years in the past whenever gasoline prices went higher earlier this decade.

But having them up around $100 a barrel and gas on average above $4 a gallon throughout the country, diesel is significantly higher than that. We’re seeing gas really eat into a lot of the consumer’s ability to spend. And so this is one of the reasons why people have been saying, well, why is the consumer not falling underneath this type of pressure?

Credit Card Data and Wage Growth

Well, if we go and look at credit card data, credit card data is one of the easiest ways to measure how healthy the consumer is, because it’s not just how much are they putting on their credit cards, but are they able to pay off those credit cards? And on top of that, can you line up that credit card data with the wages that they’re earning in order to pay off that?

And that’s exactly what we’re going to show here. So Bank of America has some really good charts that show how different income demographics, so lower income, middle income and higher income are using their credit cards both on a discretionary and overall basis. But then how that wage growth is factoring into their ability to pay off those credit cards.

And so this top left box here shows the different income demographics going back to 2023 and how much they’re spending on their credit cards. And we’re seeing like we saw in the last chart, that spending increase since the beginning of the year, as a result of a lot of the additional increases in gasoline prices.

If we break that and this is total spending, if we break that into discretionary spending, we can still see that increase in overall discretionary spending. So not only are we seeing an overall increase in spending, but we’re still continuing to spend on a discretionary basis, meaning things we don’t necessarily need like going on trips, buying a new car, staying in a hotel, seeing a play, going out to dinner. Those are all discretionary things services specifically, sometimes goods as well. But we are seeing that increase in lockstep with overall spending.

Now, you would only really do that if you’re a consumer, if you’re feeling good about the way that your financial health looks. And one of the key things that makes people feel good about their financial health is how much they’re getting paid for their jobs. And if wage growth is continuing to increase year over year, then people feel more comfortable in their job.

And on top of that, we don’t have a chart for this. But if they’re not, if they’re not comfortable with their job, then they can just go down the street to the next employer if there’s a job available. And right now, jobs remain very plentiful at all income cohorts.

So what we see here is wage growth for lower, middle and higher classes.

And throughout the last couple of years, we did see a decline in that growth. Now growth was still positive, but it was growing at a slower rate. But what again we saw in 2026 is wage growth really bounce hard not only for middle income earners but lower income specifically to the point now where lower income earners are earning more or I shouldn’t say more, but their wage growth is increasing at a faster clip than other income cohorts.

And we see at the orange bar, the higher income cohort is actually seeing their wage growth falter a little bit so far this year.

Are Consumers Paying Off Their Cards?

So if we’re seeing all this spending and we’re seeing wage growth increase, well, let’s look at credit card balances. Are they actually getting paid off. And the answer is yes. And in fact more consumers are paying off their credit card every month this year than they ever have in the past five years.

And these rainbow colored bars show that.

So the left chart here shows again lower income, middle and higher income demographics. And each bar is the percent or excuse me, the amount of individuals paying off their credit card bill every month year over year. So 2019 is the light blue, 2020 is green. We skip a couple of years because the the data is noisy post-COVID.

So picking up in 24, we’re continuing to see more people pay off their credit cards in 25 and in 26. In that case is the same across each demographic. So if you would think that the consumer is starting to break under these additional expenses, we would see fewer people paying off their credit card bills every month. But that’s just simply not the case. In fact, the opposite is true. More people are paying off their credit card bills every month than they have over the last five years.

Now there is a modest increase in individuals or consumers only paying the minimum on their credit cards, and that would be a red flag if we saw that spike. But what we’re seeing is that growth in individuals only paying the minimum is very modest compared to the growth of people paying off their credit cards year over year.

So we do see that in the lower income, middle income and higher income, a slight increase in the amount of individuals that are only paying the minimum under credit cards. But we can see, at least in the higher income, there are still more people paying off than what there were before. And in the lower income, yes, it is continuing to grow, but we’re seeing that health, especially in the form of wage growth, outpace the stressors that we would traditionally see in a market where prices are increasing, yields are increasing, and therefore the consumer should be stressed. But that’s simply not what’s happening these days.

So for as long as the consumer remains resilient in today’s economy, even despite these inflationary pressures, higher gas prices, higher interest rates, we would expect the economy to continue to grow as well. If we do see cracks in the consumer, that’s where everything starts to get a little wobbly from an economic growth perspective.

We’ll want to take a look at what those catalysts are. Generally speaking, it would be higher rates or higher inflation. But right now the consumer’s remaining very resilient because not only is there are there wages growing, but we’re also seeing their net worth increase substantially as well. So that’s it for this month’s market update. If you have any questions, please feel free to reach out. We’re always happy to answer for you. Thank you very much.