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Still spending: U.S. consumer strength in a higher-cost environment

Intro: Portfolio Managers Jeremiah Buckley and Josh Cummings share their perspectives on U.S. consumer strength and why they remain constructive on spending despite higher energy prices.

Takeaways:

• The U.S. consumer has been portrayed as stressed, but we still see a fundamentally positive environment. Credit card spending data show stable to slightly accelerating trends that do not support expectations of a broad consumer pullback.

• Despite inflationary pressure stemming from higher energy prices, we see three underappreciated supports for spending: a less energy-intensive economy, a stable labor market and three years of real wage growth, and household balance sheets that are in generationally strong shape.

• We believe near-term uncertainty has created attractive entry points in consumer discretionary. Restaurants, retail, and travel-related companies are now trading below historical valuation ranges despite earnings growth in line with long-term norms.

Media coverage has portrayed the U.S. consumer as increasingly cautious and stressed, even as actual spending has remained stronger than sentiment would suggest. The conflict in the Middle East has pushed energy prices higher, and that raises the question: Will households eventually pull back, and if so, what would that mean for company earnings and economic growth?
When we assess the overall health of consumer spending and weigh the factors that support it, we still see a fundamentally positive environment. The picture that emerges from credit card transactions, labor market trends, and household balance sheets is not one of a consumer on the brink; it is one of a healthy consumer who is adjusting, reallocating, and continuing to spend.

What the spending data shows
One of the more useful gauges of consumer health comes from credit card spending data, which captures activity across income levels and categories in real time. Visa and MasterCard both provided updates in late May. Their message was consistent: Spending trends are stable to slightly accelerating.
Visa described an “enormous amount of resilience” across discretionary and nondiscretionary categories, across all spending bands, with slight improvement continuing through mid-May and beyond. MasterCard reported continued growth into May, with consumers making adjustments between categories. These trends indicate that consumers are not pulling back but shifting somewhat toward nondiscretionary purchases as energy prices rise.
That distinction matters. We are not seeing distress; we are seeing budgeting. This is particularly true for households where gasoline can represent a larger share of monthly spending. But the majority of U.S. consumers have been able to manage the increase in gas prices and have not meaningfully reduce overall spending. We don’t think pockets of strain automatically translate into a broader consumer collapse.

Three underappreciated supports
There are three factors supporting consumer health that are often overlooked. First, the U.S. economy is dramatically less energy-intensive than it used to be. Compared with the 1980s, 1990s, 2000s, or even 2010s, households and businesses require meaningfully less energy per dollar of economic activity. Renewables have grown steadily in the energy mix, and fuel efficiency mandates have raised miles per gallon standards for vehicles over the past decade and a half.
For the typical household, gasoline represents roughly 3% to 4% of total spending. A sharp run-up in prices delivers a shock of hundreds of basis points on that line item – uncomfortable, but manageable for most consumers.
Second, wages have outpaced inflation since 2022. That margin has narrowed recently, but the cumulative effect of three years of positive real wage growth has strengthened purchasing power (Exhibit 1). What’s more, unemployment remains low at 4.3%, and job openings remain substantial. It is a labor market with low velocity – not a lot of job creation or losses – but one that is stable and not deteriorating. Furthermore, the fears that artificial intelligence (AI) could rapidly cannibalize employment have not shown up in the aggregate data.
What has shown up is productivity: The economy continues to post strong productivity gains, increasingly amplified by AI adoption across industries well beyond technology. Consumer companies that deploy AI effectively in operations and customer engagement are already seeing the benefits. Productivity-driven wage growth directly supports purchasing power.
Exhibit 1: U.S. real average hourly earnings
Real wage growth has accumulated over the last three years.

Source: Bloomberg, Bureau of Labor Statistics. Private Nonfarm Employees, Seasonally Adjusted.

Third, household balance sheets are in generationally strong shape (see Exhibit 2). Nearly 40% of owner-occupied homes carry no mortgage debt whatsoever. Household equity in residential real estate is at historically elevated levels. In addition, years of compounding equity market gains have created a meaningful wealth effect.
Further, higher interest rates, often discussed as a pure headwind, are actually a net benefit for households with more assets than liabilities. Those households earn more on their cash and fixed-income holdings.
Exhibit 2: Household debt service ratio
Debt service burden as a share of disposable income has remained well below historical averages.

Source: Federal Reserve. Household debt service payments as a percentage of disposable personal income; seasonally adjusted. Combined mortgage and consumer debt service ratio. Last update: March 20, 2026.