The Decisive | Season 7 | Ep.12 - Still Spending — For Now: US Consumers Enter Holiday Shopping Season

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Kristen Hallam:

Hello, and welcome to The Decisive. I'm your host, Kristen Hallam. Last year, our expert guest, Michael Zdinak, Economics Director, Consumer Markets at S&P Global Market Intelligence, described U.S. consumers as “following their wallets and not their fears.” A year later, they are still spending, but rising prices, lower savings, and growing credit card debt raise new questions about how long that can continue. Michael, who's recently been quoted in the Financial Times, joins us again to connect the dots and look ahead to the holiday shopping season in the U.S. Michael, welcome back to The Decisive.

 

Michael Zdinak:

Thank you so much. I'm excited to be here, but a little bit nervous. We have a lot to talk about.

 

Kristen Hallam:

We sure do. So let's dive in. Now, Michael, when we spoke last year, people remained unhappy about the economy, but they continued to spend. You warned that the picture was maybe more precarious beneath the headline numbers, but you did expect consumers to muddle through the malaise, with spending holding up despite weak sentiment and rising prices. Looking back, did the U.S. consumer behave as you expected over the past year?

 

Michael Zdinak:

Thank you. Yes, I've been on the road a lot lately speaking to clients, and as part of that, I always look back at our past forecasts to see what I told them this time last year. And I have to say that many parts of the economy shook out about as we expected. There was no recession, no spike in unemployment, no sharp pullback in demand, and the expectations that we have for tighter monetary policy are now coming into play right now with the recent rise in yields. That's not to say that things necessarily went smoothly in the last year. Consumers, as you pointed out, are deeply unhappy, and I think that's one of the ways that is different about the tone heading into this holiday season. And as part of that, and the swings we've seen in policy, the quarterly profile of growth has been noisy the last couple years. These are all things that we in this business have had to learn how to deal with.

 

But at the risk of sounding flippant, the only development we didn't really have in our outlook last year was a war with Iran. And I think that what is surprising for people in light of that fact is how resilient the economy has proven to be despite those shocks. Given all these ups and downs we've seen, all this uncertainty, all this angst about inflation, the economy has continued growing.

 

Kristen Hallam:

So, Michael, your current outlook is, again, neither a boom nor a bust. Is that essentially a continuation of last year's story, or are consumers arriving at the same outcome through different means? In other words, has the underlying story changed?

 

Michael Zdinak:

In broad strokes, no, the underlying story hasn't really changed. Unemployment is still low. Spending growth is still being supported by gains households have seen in recent years, whether that's out of wages or wealth. But you're correct to point out that what feels different about this year is that there's certainly an extra edge to the consumer. Uncertainty is exhausting, and whether that's uncertainty around jobs, AI, or policy, everyone's tired. And inflation is frustrating. I can't overstate how much people hate inflation. So when consumers tell you that they're running just to stay in place, that pain is real. But all that said and done, our outlook for the next year has only improved in recent months. So setting aside the obvious risk, it's hard to not look at the fundamentals of the economy and see one that's expected to expand next year despite the angst.

 

Kristen Hallam:

Okay. Now, Michael, as you mentioned, you're fresh off the speaking circuit, and I'd like to ask you about your remarks at the HIRI Home Improvement Insights Summit in September. You said at the time growth is likely to shift away from consumer spending and toward business and inventory investment in 2027. What would a less consumer-led expansion mean for retailers and for the broader economic outlook?

 

Michael Zdinak:

So this insight has been a hallmark of our forecast for some time now, which is that some of the softness in spending is being offset by an increase in investment. A lot has been written about the AI-adjacent investment and the implications of that for the economy, but inventories broadly are also low. And looking ahead to 2027, we expect those to be rebuilt. So that's a real tailwind to growth. How that connects to the consumer is that one of the big reasons why our outlook for the next year has improved in recent months is because of the strong GDP growth we saw in early '26, which has only been revised up, the robustness we see in third-quarter data today, and the upward revisions to things like disposable personal income. All of which are going to support near-term growth heading into next year.

 

Kristen Hallam:

Now, again, getting in the time machine and going back to last year for a minute, Michael, you pointed to rising real hourly earnings as one reason consumers kept spending despite their pessimism. This year, income gains may only be keeping pace with inflation, which you mentioned earlier, while higher equity values and low unemployment are providing support. Has the engine of consumer resilience shifted?

 

Michael Zdinak:

In a word, no. And from my 5,000-foot view of the economy, it's all about the gains in wealth and the low unemployment rate. And those are enough to keep growth positive, even if wages are only keeping up with inflation. Now, what's interesting about that is that part of that reason is technical, as BEA's annual revisions have recently revealed. So the savings rate was revised up, quite dramatically. And that's because income may not be as well measured in the short term as spending is. So often what we attribute to the resilience in spending over the year is partly a question more of timing and reconciling the strengths and weaknesses of different data sources. What we have today versus what we learn tomorrow and what they both tell us about yesterday.

 

Kristen Hallam:

Wow, that's a great way to think about it, actually. Referring to another one of your speaking engagements recently, in your presentation at the NABE, or National Association for Business Economics conference in October, so earlier this month, you challenged the conventional view that an aging population must weaken consumer spending, arguing that accumulated wealth can support demand as households age. So how much of today's consumer resilience reflects older households spending out of wealth rather than income?

 

Michael Zdinak:

I think there's a fascinating and untold story there. But first, that talk was a lot of fun, both to give and prepare for, because I was speaking both with and to experts on consumer spending. And so I just learned a lot from doing it. My small contribution was to discuss exactly what you described, how in our model, consumption follows what in economics we call the life cycle hypothesis. And that means that as the economy ages, spending patterns shift. You spend mostly out of income as you age, then, as your income growth peaks, you shift, and later you spend out of your accumulated wealth. That allows you to smooth consumption over the life cycle. And what we found using our model pushes back on the kind of mechanical interpretation described often as a declining labor force leads to an imminent pullback in consumer spending because real wage gains, which are tied to inflation, stop for anyone receiving Social Security.

That's a compelling story, but the intuition's a bit too simple. Our model rounds that out and we see that older households, which are sitting on massive gains in wealth over the last year with the rise in home prices and equity prices and everything, face a choice. They either spend more out of wealth or accept a lower level of consumption. And we believe that they're going to spend more to continue consuming at the same level they have enjoyed their whole lives. And that's going to be an actual net positive boost to spending, not a large one, but net positive instead of a drag in the years ahead. From those conversations, a lot of interesting thoughts came out of that, and I look forward to writing actually a lot more about it next year. So stay tuned.

 

Kristen Hallam:

All right. Journalists, take note. Fascinating, underappreciated story in the U.S. economy there, for sure. So speaking of writing research, Michael, in your recent research, you have noted that consumers have used lower savings and faster credit card borrowing to smooth their spending. Does that suggest that the resilience we discussed last year has come at a cost? And how long can that adjustment continue?

 

Michael Zdinak:

It certainly can't go on forever. And so when people point to a decline in the savings rate, this is exactly the dynamic they're referring to. The counterpoint to that is the fact that consumers have access to credit and the ability to draw down on savings—saving, which is the flow of income into savings, not the stock of savings they have to draw on from past gains in wealth and income to smooth consumption when things like inflation or gas prices tick up. So there's a positive side to that coin as much as there is a negative side of the coin. What is always the million-dollar question is when do those buffers run out? We've heard this story since 2002, 2004, now in 2026, that at any moment the consumer is going to throw in the towel, savings are going to be tapped out. And what we've learned time and time again is that they have more ammunition or more fuel in the tank than we expect.

And so I would not bet against them going into this holiday season. Maybe if this current round of inflation picks up next year and the expectations for monetary policy exceed what's in our forecast, then we could see a pullback in spending. But if you think back to the number of older households that are sitting on the amount of wealth that I was referring to earlier, it would take a pretty dramatic correction in equity prices and the assumption that they are exposed to them at their age to really see a large pullback in spending out of wealth from them.

 

Kristen Hallam:

So, Michael, last year when we spoke, you cautioned that averages could hide very different experiences for higher- and lower-income households. Do today's strong headline retail sales figures still mask that divide, and has it widened over the past year?

 

Michael Zdinak:

Absolutely. And if you're a person who's concerned about the experiences of different households or different consumers in our economy, there are still good and bad stories you can tell. Households in different parts of their life are experiencing dramatically different forms of inflation. Whether or not you own your own home, are paying for childcare, are buying a new car, or are paying for healthcare is going to very much determine how much what you pay each year for those services changes. For our view of the economy, we're mostly interested in what happens on average or in aggregate. But when we drill down into the details and we're looking for the reasons behind those numbers, what's really driving those changes, like we were talking about the aging population and how that's affecting consumer spending, that harkens back to this idea of the 2 arms of the K-shaped economy. Or I think even people are now talking about an E-shaped economy where the middle and top are doing well, but the lower part is not. What we have to really think about and keep in mind is who makes up those different arms of the K? Is it older or younger households? Is it rich versus poor? From our perspective, it would be rich is also synonymous for an older household, and support we're getting from spending out of that demographic is not small. And again, it's not expected to end anytime soon.

 

Kristen Hallam:

So Michael, going back to your HIRI presentation, you described homeowners as caught between spending on renovations versus maintenance. Is home improvement spending a useful barometer for the choices consumers are making more broadly?

 

Michael Zdinak:

Absolutely. And to be completely honest, all cards on the table, housing is the one sector that we're probably the most bearish on. We were correct to point out this time last year that mortgage rates weren't coming down in 2026. And with rates now rising and inflation higher, there's a good chance that we'll be right this time next year in saying that they're not coming down much in 2027 either. Combine that with the number of mortgages that are locked into rates below 4 or 5%, and the picture is just one of very little turnover, very little volume in housing, which drives a lot of residential improvements. But as I said at HIRI, that in itself raises some very interesting questions, especially in light of discussions we're having about an aging population. If households aren't moving as much, how does their behavior change? We've already talked about how they're sitting on these vast gains in past wealth and income. So maybe they decide to renovate their home or expand an existing home.

And if they're older, maybe they make the choice to invest in upgrades that will make it easier to age in place, to live in that home they're in now for longer. The challenge is that we're only starting to see these changes in behavior happen, that consumers have to first accept that rates aren't coming down, that they're not going to be able to move to a bigger or better home in the near term unless they see an increase in their income. But it's going to take some time for us to learn whether or not this change of behavior is large enough to move the needle on residential improvement or consumer spending. But our forecast does have some strength in spending in residential improvements based on the belief that a lot of these upgrades that you would expect, this routine maintenance that needs to, that's required to make sure, you know, your roof isn't leaking and your heater's still heating, can only be put off for so long. And so, if households aren't moving to better homes, there's a good chance that they'll stop putting off those improvements.

 

Kristen Hallam:

Got it. So let's zero in on the upcoming holiday shopping season. Last year you said Black Friday was no longer the make-or-break event it once was because promotions and holiday spending had spread across weeks or even months. This year, seasonal promotions again appear to have pulled some auto and online sales forward. Is the traditional holiday shopping calendar becoming less useful for reading consumer demand? Should we stop doing this episode every year?

 

Michael Zdinak:

Absolutely not. No way. Then I wouldn't have an excuse to get all dressed up and join you from my basement. But to be clear, the holiday season is important because it not only bookends this year, But it sets the tone for next year as well in terms of growth and our expectations for consumer spending. And so even when our forecast is boring, like we said that our expectations for this year aren't much different than they were last year. Real sales will be a little bit lower because prices are a little bit higher, but for the most part, spending will continue along as consumers muddle through this malaise, being soft but steady, neither booming nor busting. But that's still an important test of our expectations. If we turned out to be wildly wrong, in either case, consumers pull back dramatically or push the limits by either borrowing a lot of money or spending like gangbusters, that tells us something about the economy that we didn't know today. And so it is really important every year to check in on this season because it's important for retail. A lot of revenue is made in this time of year, and it's important for our forecast for next year because it gives us a really good read on the health of the consumer.

 

Kristen Hallam:

So, Michael, what would a healthy holiday season look like once you adjust for prices, promotions, and purchases that were pulled forward?

 

Michael Zdinak:

Yeah, you're right to point out that shopping has already begun in earnest. So the data that we'll get next month for October will really set the tone for the holiday season. Now, whether that reflects more a consumer who's smoothing their spending over months in response to those higher prices, or just one who's always willing to keep spending, is an open question. I see both in the data from time to time. But apart from those headline sales figures, one of the things that I'm really keeping an eye on this year is air travel, and I think that'll be a great measure of the health of the consumer. With gasoline prices and fuel prices as high as they are, you can buy a lot of presents this holiday season for the cost of an airline ticket. So if consumers don't cut back there, I'd be surprised to see if they cut back anywhere else. And so then the only real question is, do they trade down in any way, or do they go for more practical versus luxury gifts? And that's, again, that's all interesting nuances to the story or anecdotes that explain consumer spending, but it's not really what's driving our outlook.

 

Kristen Hallam:

All right. Now, Michael, as you've already proven in this episode and previous episodes of The Decisive, you are extremely quotable. So you've also proved it in numerous media interviews as well. If last year's consumer was, quote, following their wallet and not their fears, end quote, what phrase best captures the U.S. consumer this year and what will determine whether that description still holds a year from now? So in other words, what's this year's quotable phrase from Michael Zdinak?

 

Michael Zdinak:

Oh, wow. That's rough. And for the record, you're too kind. And honestly, I can't even take credit for that quote you just offered. I'm pretty sure—90% sure that was written by my colleague, Mike Montgomery. He's the real genius when it comes to gauging the temperature of the consumer. And I rely on him a lot for this analysis. He's great. And it's been a pleasure to work with him all these years, but to your question, in the spirit of Halloween, I guess I can try my best to put my own twist on that. I'll steal the quote from what I'm writing right now about our forecast for candy sales, and that's that inflation this year feels like the sequel to a movie nobody asked for. The plot's tired, the reviews are terrible, and to make matters worse, we're all paying more to have to see it. So it kind of goes to show you why people feel so bad. We're getting less for our dollars, and that's been the big change since the pandemic. The U.S. consumer was always accustomed to getting more, especially this time of year, for their dollars, and that has fundamentally changed. But to tie that back to your question, this same theme has underscored sentiment all year, and the bad news hasn't really yet broken the back of the consumer as they've, as you pointed out, continued to follow their wallets. But the operative word heading into next year is yet. So while our forecast for growth has improved, no one should be surprised to learn that there are still plenty of risks out there.

So when we're looking at the view ahead, once we get past this holiday season, odds are there will be no surprises. It's where do we go in the first or second quarter of next year? How does the shortage of fuel resolve? How much does that pass through to higher prices? When inventories start being rebuilt, what does that do for inflation? And how aggressively does the Fed have to respond with tighter financial conditions in response to that inflationary impulse? That's what we're really keeping an eye on there. From there, the outlook for the labor market is relatively steady. Our view on unemployment is that it might drift a basis point or two higher, but not much more than that. So anything that would dramatically change that outlook would change our view of where the U.S. economy is today and headed tomorrow.

 

Kristen Hallam:

All right. You mentioned the famous candy tracker there, so I look forward to seeing that. But before I let you go, Michael, since this episode is airing on Halloween, I have to ask: favorite candy?

 

Michael Zdinak:

Reese's. It's always got to be Reese's. I'm kind of ride or die with my peanut butter cups and chocolate. So I'll choose that over anything else.

 

Kristen Hallam:

A 100 Grand bar, full size if possible, is my favorite. Michael, once again, it's been a real pleasure having you on The Decisive Podcast. Thank you so much for joining us again and for helping us understand how the story of the U.S. consumer has evolved over the past year and what may come next. And thank you all for listening to The Decisive Podcast. Until next week.

 

Michael Zdinak:

Take care.