Total US spending and incomes keep growing. Why aren't consumers believing that?

We had indications that consumer spending had been holding up well with good retail sales numbers for the last 2 months, and we got more confirmation from that on the larger-scale spending and income report that came out from the Commerce Department yesterday.

In spite of still-rising prices on most goods and services, a Friday report from the Commerce Department finds the pace of consumer spending jumped more than expected in August and is a factor helping buoy a U.S. economy that’s facing elevated inflation alongside a rickety jobs market….

U.S. workers saw their incomes grow by 0.4% in August but their spending rate increased even more, moving up an unexpected 0.6% or just over $129 billion.

“Net, net, consumers literally hit it out of the park with very strong gains in spending not just for August, but June and July as well,” Chris Rupkey, chief economist at Fwdbonds, told CNBC. “Summer was the time for consumer revenge spending after hunkering down in retreat from the shops and malls during the uncertainty and fear produced by the White House tariff rollout in April and May.”

Yet consumers continue to feel worse about the economy. On the same day the strong spending numbers came out, we had another drop in consumer sentiment.

Consumer sentiment confirmed its early-month reading and eased about 5% from last month but remains above the low readings seen in April and May of this year. Although September’s decline was relatively modest, it was still seen across a broad swath of the population, across groups by age, income, and education, and all five index components. A key exception: sentiment for consumers with larger stock holdings held steady in September, while for those with smaller or no holdings, sentiment decreased. This month, sentiment moved down about 9% for independents and 4% for Republicans, whereas it lifted this month for Democrats. Nationally, not only did macroeconomic expectations fall, particularly for labor markets and business conditions, but personal expectations did as well, with a softening outlook for their own incomes and personal finances. Consumers continue to express frustration over the persistence of high prices, with 44% spontaneously mentioning that high prices are eroding their personal finances, the highest reading in a year. Interviews this month highlight the fact that consumers feel pressure both from the prospect of higher inflation as well as the risk of weaker labor markets.

I bolded the part about rich investors because I think it explains a lot about how the overall numbers are still good while everyday consumers don’t think things are going well. Keep that in the back of your mind as your read on.

I’d also quibble with saying that “workers” saw incomes rise by 0.4%, because wages and salaries had their 2nd lowest increase in the last 12 months, at $33.0 billion (+0.25%), as part of a general cooling that we’ve seen in both hiring and wage growth for much of 2025.

Instead, we saw a sizable increases in Medicare benefits (+$10.7 billion), income for farmers (+$15.8 billion), which continues a trend of a large amount of income growth coming outside of wages, salaries and benefits that workers get from employers.

What I think we may be seeing is richer Americans using their stock gains as part of a growing inequality of consumption, but while the people who rely on wages for the income (aka – people who work) are spending increasing amounts of their income just to get by, and are worried that they won’t be able to do even that in the near future.

Alicia Wallace at CNN went deeper on this subject, noting that prices for staples keep rising, hitting lower-income Americans, and causing cutbacks in discretionary spending while richer people are spending more than ever.

Recent months’ data and company earnings reports show that Americans are putting an increasing share of their dollars toward essential areas — particularly health care, housing and insurance — as they pull back on other spending, said Adam Josephson, a longtime paper and packaging analyst who publishes a newsletter on consumer spending and other economic trends….

“You’ve been seeing it for the past year among all manner of consumer companies, whether it’s [consumer packaged goods] companies, retailers, restaurants, airlines, hotels, you name it, any company that sells something that could reasonably be considered discretionary seems to be having a problem,” he said. “If these companies that sell to the consumer economy are experiencing growing difficulties, what are they likely to do? They’re likely to contract, cut costs, which means lay people off, shut facilities,” [Josephson said].

Josephson pointed to Starbucks as a prime example.

The nation’s largest coffee chain announced plans Thursday to close 400 underperforming shops nationwide. Although the closures account for barely 1% of Starbucks’ footprint, the cost-cutting includes the layoffs of roughly 900 employees.

The recently-released retail sales report echoes that analysis. Even with "core" retail sales outside of autos and gasoline going up by 0.7% in August, we saw furniture stores, health and personal care stores, and department stores all have declines in that month, and building supply/gardening stores and department stores had a 3-month decline in sales vs the previous 3 months (before we account for inflation), and grocery store sales aren't going up by any more than the rising prices inside the stores.

So that's why these good numbers for income and spending may not feel right when you take into account your own experience and your community. Because it isn't acting like a 3%+ GDP economy in most of America, since much of the income growth isn't coming from jobs, and much of the increase in consumer spending isn't being done by everyday people.