After inflation, household income rose just 2.9% last year.

Income gains cool as prices stay stubborn

After adjusting for inflation, U.S. Household income grew 2.9% last year, down sharply from 5.1% the year before, government and Moody’s figures show. That drop matters. Income powers consumer spending — and consumer spending accounts for roughly two-thirds of the U.S. economy.

On a nominal basis the U.S. Bureau of Economic Analysis recorded stronger numbers: household income climbed about 5.5% last year. But forecasters expect nominal gains to slow. The BEA and Moody’s project income growth of roughly 4.25% this year and about 4% by 2028. Moody’s economist Scott Hoyt warned that many of the usual supports for income gains are fading.

“It seems like all of the key drivers of household income growth are providing less support than they have in the recent past,” said Scott Hoyt, economist at Moody’s Analytics. That’s why economists are watching wages, corporate payouts and interest income. Those sources helped drive the boom, but they’re cooling now.

Borrowing and card use show consumers pulling back

Federal Reserve data for June gave another sign of fatigue.

Total consumer credit rose by $8.9 billion, an annualized pace of about 2.1% — weaker than economists had expected. Revolving credit, which is mostly credit-card debt, actually fell by $1.7 billion for the month, the largest drop in roughly three years.

Jeffrey Roach, chief economist at LPL Financial, said the numbers reflect pressure on household wallets. “Consumers are feeling the pressure from elevated price levels and slowing income growth,” Roach said.

When people pull back on credit cards, they usually trim small discretionary spending first — like dinners out, short trips and nonessential shopping.

The Fed also revised prior months’ data upward, showing consumer credit grew more in May than first reported. Still, the pullback in revolving credit and other signs of strain suggest the bar for robust spending has been raised.

Spending slowed and GDP softened at year’s end

The Commerce Department’s advance estimate showed the economy expanded at a 1.4% annual rate in the fourth quarter, softer than the prior quarter’s 4.4% pace. Consumer spending — the largest component of gross domestic product — increased just 2.4% in that period, down from a 3.5% gain in the third quarter.

Weaker household demand was a key reason the headline GDP figure fell. And while growth remains positive, the pattern is unusual: steady output but modest job gains, and surveys showing consumers feeling pessimistic about the near-term outlook.

Some of the divergence owes to uneven behavior across income groups. NBC’s reporting on recent data pointed to a “K-shaped” dynamic — upper-income households maintained spending more readily, while lower-income households showed slower improvement. Banks’ own data, though, indicate some lower-income consumers continued to lift spending, even if the pace slowed.

Everyday costs keep weighing on households

Polling and anecdote back the numbers. A Primerica survey of 1,085 adults earning between $30,000 and $130,000 in late December found 65% say their income is falling behind inflation. That’s a wide share.

“For too many middle-income Americans, the rising cost of everyday essentials is still making it hard to get ahead,” said Peter Schneider, president of Primerica. He pointed to basic bills and grocery prices as the persistent pinch.

Detroit resident Pat Baldwin, 59, told pollsters inflation is “getting worse.” She noted food and clothing costs remain high and estimated her gas and electric bills climbed roughly 30% to 40% over recent years. Separately, U.S. Natural gas bills were up about 5% year over year in January, according to reporting that tracked utility price trends.

Where the pressure is coming from

Wage growth has slowed from its pandemic-era highs, and other income sources — corporate profits, dividends and bank interest — aren’t filling the gap the way they did earlier in the recovery. That combination reduces household cash available for spending.

That said, inflation, too, while far below its 2022 peak, has bounced up from its earlier trough. CPI fell from a 9.1% spike in mid-2022 to about 2.4% in early fall, but it has nudged back toward 3% in recent months — above the Federal Reserve’s 2% target. Hoyt said full victory over inflation is largely behind the U.S.; further progress is likely but slower, and new policy moves — such as proposed tariffs on imports — could lift prices again.

Credit trouble is showing up in delinquencies

More than just slower borrowing, repayment patterns are deteriorating in places. A New York Federal Reserve report highlighted rising delinquencies on credit cards and auto loans, signaling that some households are struggling to keep up with obligations.

Those trends matter because they ripple. Lenders react by tightening credit, which can reduce household buying power.

Businesses feel it too — lower consumer demand feeds into slower revenue growth and can curb hiring or investment.

Why the economy might stay fragile

Economists say the slowdown in income gains by itself probably won’t force a recession. But it makes the economy more vulnerable to shocks — a widening trade war, a big commodity-price spike or a sharp slowdown in hiring could push growth off a soft patch and into contraction.

Hoyt at Moody’s flagged that threat clearly: if more pressure lands on incomes, households will have a harder time sustaining spending. And because consumption drives most output, any large step down in spending is likely to ripple through hiring and business investment.

Bottom line: the U.S. economy is still expanding, but its momentum is fading. Consumers are more cautious. Borrowing is cooling. Inflation hasn’t fully retreated. And those factors, taken together, make the coming quarters riskier than they looked a year ago.

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“It seems like all of the key drivers of household income growth are providing less support than they have in the recent past,” said Scott Hoyt, economist at Moody’s Analytics.