Month after month — despite inflation, tariffs and rising debt — the fragile U.S. consumer has come through for retailers, even in the discretionary categories covered by Retail Dive. Case in point: January retail sales in those segments surged 6% year on year despite a new low in consumer sentiment.
Consumers may not remain so resilient in 2026, however, as fresh challenges arise, leading some analysts to question retail sales forecasts that top 3%. In a report released earlier this year, Bain & Company researchers noted greater strain on U.S. consumers would hem in spending and undermine volumes, but nevertheless predicted sales would rise 3.5%.
Others see that as optimistic. With mounting credit card debt, weakening employment and now surging fuel costs weighing on shoppers, retail sales could struggle to reach 3%, according to research from the New England Consulting Group. Household delinquency worsened in Q4, and “serious delinquency ticked up for credit card balances, mortgages, and student loans,” according to the most recent report from the Federal Reserve Bank of New York.
Buy now, pay later delinquencies are also higher than expected, according to Tom Sebok, NECG managing partner and principal.
“The thing that's probably most different about how we're looking at the world is that we have a higher level of appreciation for the fact that people are likely to have less money to buy stuff in 2026 than we thought going into the year,” Sebok said by phone. “I think a fundamental difference in our approach is to recognize that retail is dependent on people having money.”
The consumer and the Iran war
Oil price spikes like those happening since the onset of the Iran war do “not appear to derail the economy or consumer spending,” according to research from Telsey Advisory Group examining historical patterns dating from the 1973 Arab oil embargo through the current Russia-Ukraine war.
“While higher oil prices act as a tax to consumers and businesses weakening economic growth, consumer spending is most negatively impacted by more severe downturns in the economy, often from financial crises, that are exacerbated by the oil price spikes,” Dana Telsey and Joseph Feldman said in their report Monday, calling the current economic backdrop “mixed.”
“I think a fundamental difference in our approach is to recognize that retail is dependent on people having money.”
Tom Sebok
Managing partner and principal, New England Consulting Group
In a “shock” situation, where gas prices get to about $4 per gallon, spending on discretionary categories do start to take a meaningful hit, though, according to research on the effect of oil prices over the last 25 years from Wells Fargo analysts led by Ike Boruchow. Such price surges siphoned 180 basis points from consumer spending in the first three months that followed, then worsened to 240 basis points over the next six to nine months, they found, per a Monday client note.
Based on that history, which doesn’t reach as far back as Telsey’s research, softlines retailers like those selling apparel could see a 200- to 300-basis-point hit to comparable sales, “which can worsen as the shock prolongs,” Boruchow said.
The bad news for retailers is that there were signs of weakening before the conflict began, according to Wells Fargo economists Tim Quinlan and Shannon Grein, citing statistics from January that they cautioned were rendered outdated by the impacts of the Iran war. Specifically, spending on goods fell 0.4% and on discretionary services — like travel, recreation, dining and hospitality — slowed.
The January figures are “still important in terms of monitoring the state of the consumer, and show households entered the year with fairly sturdy spending momentum,” the Wells Fargo economists said. “But under the surface a renewed slowing in discretionary spending suggests some cautious behavior among households, even ahead of the recent oil-price shock.”
That shock may not crash the economy more broadly, but the surge in energy prices are “adding fresh inflation risk to an already fragile backdrop,” the Wells Fargo economist group said in its weekly report, released Friday. The latest measures of the consumer price index and personal consumption expenditures “show further progress on inflation stalling out,” they said.
Energy costs are also getting an unwelcome boost as tech companies build out their AI infrastructure, NECG’s Sebok said.
“Bottom line, everybody who's a consumer of energy — whether that's transporting goods from a warehouse to producing things and most importantly, the consumer to whom U.S. retail sells — is going to see their energy expenditures rising faster in 2026 than anybody thought a month ago,” he said.
Meanwhile, tax refunds — always only fleeting relief for consumers — are not as high as some analysts anticipated, or at least are peaking later than they have previously. In the six weeks ending on March 6, tax refunds rose 10% year over year, up from 7% earlier in the year, according to Bank of America analysts led by Lorraine Hutchinson, citing data from the U.S. Treasury.
“This is disappointing vs our economists' expectations that total tax refund payments would increase by more than 25% this year,” Hutchinson said in a Monday research note.
Not even the more pessimistic analysts at NECG are predicting a recession, and Sebok said that consumers in the U.S. do remain resilient. But their stamina “is just not quite as bulletproof as some of the other panelists are assuming,” as they struggle to afford various items in the budget, including healthcare, housing and household goods, he said.
That could mean buying less from retailers: Unit demand for discretionary merchandise in February fell 3% year over year, according to data from Circana.
“We are living in a volume mirage,” Sebok said. “Retailers are charging more for less, and you can't build a healthy recovery on selling fewer boxes to fewer people.”
