Article originally posted in the CoStar on Nov. 4, 2026.

The U.S. economy expanded at a 3.4% annualized pace in the third quarter, powered by consumer spending and a surge in business investment tied to the artificial intelligence buildout. The household side of that picture looked less sturdy by the end of the quarter.

In September, inflation-adjusted spending held essentially flat, real disposable income fell and households set aside a smaller share of their income. Consumers are feeling it: the University of Michigan’s consumer sentiment index fell to 48.0 in October, the second-lowest reading in the survey’s history.

Personal income rose 0.2% in September, according to the Bureau of Economic Analysis (BEA), as did disposable personal income. Compensation, the largest source of household income, rose 0.3%, and government social benefits rose 0.3%, led by Medicare.

Adjusted for inflation, the picture is weaker. With the personal consumption expenditures (PCE) price index up 0.5% in September, real disposable income fell 0.3%, after no change in August, leaving inflation-adjusted after-tax income without growth for two straight months.

Real spending, by contrast, held essentially flat in September after a 0.5% gain in August. The longer view shows spending growth continuing to outpace income growth as real income gains slow. In September, real spending was up 2.5% from a year earlier, compared with just 1.0% for real disposable income.

Nominal spending rose 0.5%, more than twice the gain in disposable income, and the personal saving rate fell to 3.8% from 4.0% in August, the lowest since October 2022. The release also reflected BEA’s annual revisions, which reshaped the summer picture: the July saving rate now stands at 4.5%, well above the 3.0% initially reported. It has fallen in each month since.

Higher prices absorbed September’s spending gain. Energy prices jumped 5.4%, with gasoline and other energy goods up 9.2%, and energy accounted for roughly 43% of the month’s increase in nominal spending, even though it represents only 4.1% of total spending.

Prices for gasoline and other energy goods are up 35.4% from a year earlier. Core prices, which exclude food and energy, rose 0.3% for a second straight month. From a year earlier, headline PCE prices are up 3.6% and core prices are up 3.1%.

The mix of spending shifted as well. Real spending on goods fell 0.3%, after a 1.1% gain in August, led by a 2.0% drop in motor vehicles and parts. Real services spending rose 0.2%, led by a 0.5% gain in food services and accommodations, while health care and transportation services also posted gains.

September’s flat reading caps a quarter that was strong on balance. Real consumer spending rose at a 3.8% annualized pace in the third quarter, and Oxford Economics attributes part of that strength to wealth gains tied to the AI-driven rise in equity prices. Spending gains were concentrated in discretionary categories such as autos, furniture, and food services and accommodations, where high-income households account for a disproportionate share of spending, according to Oxford.

Year-over-year figures are consistent with that: real spending on furnishings and durable household equipment is up 6.7%, the fastest of any major category. Oxford expects higher gasoline prices to weigh more heavily on spending heading into the holidays, noting that, unlike the energy spike earlier this year, households have no higher tax refunds to cushion the blow.

Consumers are signaling the same strain. October’s final reading of consumer sentiment of 48.0 was the second-lowest on record; only May’s 44.8 was lower. The current conditions index fell to 46.7 from 50.9, a decline driven largely by assessments of buying conditions for durable goods, which plunged 18% on high interest rates and affordability concerns. That is consistent with September’s drop in vehicle spending. Consumers also expect more inflation: year-ahead expectations rose to 4.7% and long-run expectations to 3.5%.

For retail real estate, the composition of spending matters as much as the total. September’s consumer data tilted toward services, with spending down on real goods and spending up on services. But services only provide a limited buffer, since restaurants, fitness and entertainment depend on the same discretionary dollars that a squeeze on real incomes puts at risk.

Near term, retailers of big-ticket household goods, such as furniture, appliances and electronics, look most exposed. Spending in those categories has been strong this year, but consumers’ views of buying conditions for durable goods have deteriorated sharply. With real incomes stalling and the saving rate already low, further spending gains will depend more on job and wage growth than on households saving even less.

The Federal Reserve held its policy rate at 3.75% to 4% at its Oct. 27–28 meeting, after raising it by a quarter point in September. Two Fed governors, Lisa Cook and Beth Hammack, dissented in favor of another increase. With prices up 3.6% from a year earlier and consumers expecting more inflation ahead, the September data give officials who favor tighter policy little reason to back down.

Oxford Economics expects a 25-basis-point hike when the Fed meets Dec. 8–9. Before then, preliminary November sentiment data arrive Nov. 6 and October income and spending data Nov. 25, offering the first read on whether consumers carried their spending into the fourth quarter.