Savannah Chamber

9 Consumer Spending Consumers will spend cautiously in 2026. On an inflation-adjusted basis, we expect personal consumption expenditures to increase at an annual rate of about 1 percent, which is in line with growth in disposable personal income. The slowdown reflects tariffs on many imported consumer goods; little to no job growth in many industries and cuts in hours worked; higher (but still low) unemployment; far less job hopping; emptying of accumulated savings; erosion of the relatively strong economic and financial positions households once had; and flat or declining home prices. Consumers spent more on an inflation-adjusted basis in 2022-25 by using most of the unanticipated excess savings accu- mulated during the first two years of the pandemic. While that money is mostly gone now, residual savings will continue to support consumer spending in 2026. We expect a personal savings rate out of current income of 6 percent, which is below the pre-pandemic savings rate of about 8 percent, but the slight increase will be a weak headwind for consumer spending. An unusual degree of job security in a slowing economy will support consumer spending, too. The unemployment rate will rise, but not by much and not too fast. Because the labor market will be soft, compensation per hour will rise by 2.5 percent (compared to 3.4 percent in 2025). Wages and salaries will grow slowly as employers opt to avoid layoffs by leav- ing vacant positions unfilled and reducing hours worked. Already-low consumer confidence will not go much lower, and shoppers will be more price sensitive. In 2026, nominal personal income will rise by 4.5 percent, which implies that inflation-adjusted personal income will in- crease by about 1 percent. Income from rent will increase faster than wage and salary income. Consumer credit outstand- ing will grow by about 1 percent, which is the same as last year. Credit will be slightly less expensive than it was last year, but much more expensive that just a few years ago. Nonetheless, inflation and deferred demand for vehicles will push consumers to use more credit, so we expect revolving credit to grow faster than non-revolving credit in 2026. Household balance sheets are in decent shape, which will support credit lines. Although delinquent payments and bank- ruptcies will continue to increase, debt burdens borne by households are low to moderate. Another positive for consumer spending is that many homeowners have locked in historically low mortgage rates, but higher payments for property taxes and home insurance will offset some of the benefit. At best, wealth-effect spending will be a neutral force because we do not expect increases in households' net worth in 2026. Home prices are unlikely to increase, which will limit any gain in wealth. In addition, by historical measures, equities are very richly valued and we think equity markets will be vulnerable to correction. A sharp reversal of wealth-effect spending is a plausible downside risk for consumer spending. Household wealth may decline in 2026, but due to large gains over the extended period, it will take a major collapse in asset prices to produce a dramatic decline in consumers overall spending. We do not expect especially sharp corrections in the prices of homes or equites, but should sharp corrections occur, spending would contract, the economic expansion would end, and a reces- sion would begin. It is important to note that recessions caused by asset price corrections tend to be deeper and longer than ordinary recessions. In 2026, spending for services will increase faster than spending for goods, but neither will increase very much. Among services, providers of healthcare, education, and vehicle repairs will see above-average growth in spending. Sales of nondurable goods are expected to increase, but sales of durable goods are expected to drop. Spending for vehicles—es- pecially SUVs—will increase slightly due to pent-up demand. Price increases and demographic factors will heighten spending on pharmaceuticals and other medical products. Spending on food will shift from dining out to cooking at home, so competition among restaurants will be intense. Spending on clothing and footwear will decrease slightly. Soft housing markets will limit sales of durable household equipment, building materials, fixtures, floor coverings, furniture, and other home-related goods and services. Spending on luxury goods will slow down, too.

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