Last month, consumer spending increased by 0.7%. It was matched by personal income. According to the Atlanta Fed, the GDP will grow by about 2.5% in the second quarter. The American economy appears to be doing fairly well on paper. However, a different picture begins to emerge if you take the time to read what the Federal Reserve’s own district contacts—restaurant owners, auto dealers, and small manufacturers—are actually saying.
Based on data collected prior to May 27, 2026, the Federal Reserve’s most recent Beige Book characterizes consumer spending as “mixed” and “increasingly bifurcated.” In an otherwise measured document, the word “bifurcated” is doing a lot of silent work. Households with higher incomes are generally doing well; they continue to spend and are less susceptible to price fluctuations. However, according to contacts in one district, middle-class consumers are “squeezing more life out of every dollar before deciding to spend it.” Households with low incomes are clearly experiencing financial hardship. The use of credit cards has increased. Foot traffic in stores is declining. As discretionary spending declines, demand for necessities rises.
This is not an example of widespread consumer resilience. It is an illustration of how aggregate data is supported by survival spending.
In May, the personal consumption expenditures index recorded 4.1% annual inflation, which was more than twice the Fed’s target of 2%. After removing food and energy, core PCE is 3.4%. The central bank will maintain its hawkish stance throughout the summer, according to Fed Chair Kevin Warsh. Interest rate futures traders now have an 80% chance of at least one more rate increase by the end of the year, up from 68% only a month ago. From the perspective of pure numbers, the reasoning makes sense. GDP is growing, income is rising, and spending is rising. Why lower rates?
However, there seems to be a structural deterioration beneath the aggregate figures. Auto dealers in several districts reported a decline in demand for new cars, which was directly related to fuel prices. Instead, buyers were choosing hybrids and used cars. Middle-class households have become noticeably more frugal with their discretionary spending, according to restaurants in the Kansas City district. In a number of regions, businesses were described as covertly absorbing higher costs instead of passing them on. This is a short-term tactic that purchases customer loyalty while reducing margins in ways that are not immediately apparent in consumer price data.
Much of the inflationary pressure is being driven by energy prices associated with the ongoing conflict in the Middle East, which also affects the cost of fertilizer, groceries, shipping, and packaging. Although it’s still unclear how long those pressures will last, the likelihood of inflation spreading into more general categories increases significantly if the Iran situation is not resolved until late summer, as some economists are starting to quietly acknowledge. The chief economist at LPL Financial acknowledged this, pointing out that Labor Day serves as a kind of unofficial deadline for how well these pressures are managed.
The quality of the spending is more difficult to gauge and is rarely accurately captured by aggregate spending data. Consumer spending includes paying more for gasoline. Consumer spending includes purchasing store-brand groceries rather than name brands. Consumer spending is the use of a credit card for necessities when disposable income isn’t quite enough. These actions appear in the same column as a family making travel plans or renovating their house. The Fed must use the data at its disposal. However, the Beige Book is a document produced by its own institution, and it describes a more complex situation than the headline PCE figures imply.
Last month, consumer confidence declined once more, with the Conference Board’s index dropping to 93.1. That is significantly lower than February’s pre-conflict levels. Yes, people are spending, but over time, sentiment that is consistently low while spending remains stable tends to resolve in one direction. It’s difficult to ignore the conflict between those two data points and wonder which one is more accurate in predicting the future.
