From Business Insider · Neil Dutta · · 3m
The double squeeze on America's wallet
Consumer spending is slowing while the Federal Reserve raises rates. Together, they could squeeze the US economy hard.
In brief
Consumer spending is slowing while the Federal Reserve raises rates. Together, they could squeeze the US economy hard. The US economy faces a squeeze from slowing consumer spending and Federal Reserve rate hikes, likely to raise unemployment and lower stock prices as inflation remains stubborn. Originally reported by…
The consensus is calm
Most economists and the Federal Reserve expect strong, steady US economic growth for the rest of 2026. The Fed's latest Summary of Economic Projections shows no participants saw risks to GDP growth as tilted to the downside.
But serious doubts linger
The US economy faces a squeeze from two ends. The first is slowing consumer spending as Americans pull back amid higher inflation, sluggish income growth, and geopolitical uncertainty. The second is Federal Reserve rate hikes.
The Fed just raised rates
The Federal Reserve raised interest rates on Wednesday, the first increase in three years. Despite market expectations of calm, additional hikes are likely on the horizon as inflation progress has stalled.
Consumers drove growth early
In the first half of twenty twenty-six, American consumers fueled the economy. In the second quarter, real consumption added nearly two point five percentage points to growth, but looking ahead, several reasons suggest spending may not hold up.
Tax boost is fading fast
Americans saw about an eleven percent increase in their average tax refund in the first half of twenty twenty-six, thanks to the Big Beautiful Bill tax reform law. This boost contributed zero point four percentage points to US GDP, but will fade in the second half.
Gas and food prices rising
As the war in Iran drags on, higher commodity prices will push up gas and grocery costs. Nationwide retail gasoline prices are up one dollar and twenty five cents per gallon on average compared to the same time of year.
Energy prices defying seasonality
Prices for refined energy products have been rising, which is particularly alarming since energy prices typically fall at this point of the season thanks to the end of the summer driving surge. Diesel and agricultural commodity prices are also climbing.
Housing slowdown hits spending
Mortgage rates have recently topped seven percent for the first time in over a year. As home sales slow, purchases of major household goods like furniture, appliances, and carpeting decline. This slowdown typically takes six months to filter into decreased spending.
Inflation expectations are rising
Core inflation remains above three percent and is only projected to approach the Fed's target years down the road. Short-run inflation expectations are climbing alongside energy costs, presenting a challenge for the Fed as people start to believe more price hikes are coming.
Chip prices adding pressure
The price of semiconductor chips, critical to the AI boom, has boosted core PCE inflation by zero point six percentage points over the past six months, with no sign of the bottleneck improving anytime soon.
The squeeze tightens ahead
Fading fiscal relief, rising geopolitical costs, declining home sales, and sluggish wage growth mean household consumption will probably moderate into next year. The Fed's rate hikes will slow the economy further, likely raising unemployment and tightening financial conditions.
At a glance
The US economy faces a squeeze from slowing consumer spending and Federal Reserve rate hikes, likely to raise unemployment and lower stock prices as inflation remains stubborn.
