In May 2026, the University of Michigan Consumer Sentiment Index hit a record low of 44.8. It was its third straight monthly decline, leading some publications to note that “Americans are worn out by a salvo of economic disruptions.” But these supposedly worn-out consumers kept spending, mostly on higher-priced goods. According to the U.S. Bureau of Economic Analysis’ April report, nominal consumer spending rose 0.5% in April while inflation-adjusted spending grew just 0.1%.
The gap between collapsing sentiment and increased spending is nothing new, but it has reached a new level. This growing disconnect has confused forecasters for years. The PYMNTS Consumer Expectations Index (PCEI) points to why.
Over the same eight months that the Michigan index fell about 16% to its record low, the overall PCEI moved little, from 55.4 down to 54.5. But the index’s internal components moved in opposite directions. The confidence side, covering the national economy and buying conditions, fell in sync with the Michigan index. But labor-market security, consumers’ own assessment of their job risk, peer layoffs and ability to replace income, rose five points to the highest reading in the series.
Here’s the gap: Consumers feel worse about the United States’ current economic conditions and report feeling more secure about their own jobs and income. That distinction matters because households’ own financial circumstances have generally been a more reliable guide to spending than broad economic sentiment. But the PCEI reveals another divide. It shows that there isn’t just one consumer. In fact, there are three.
Tracking the widening divide
The PCEI condenses 11 survey questions into a single 0-to-100 score, where 50 is neutral, across three drivers: confidence, resilience and labor-market security. It tracks three distinct financial lifestyle groups.
Consumers who don’t live paycheck to paycheck sit at 61.9, essentially flat, with labor security at a series high. Those who live paycheck to paycheck without struggling to pay their bills held flat at 56.2. Consumers living paycheck to paycheck and struggling to pay bills dropped 2.8 points to 40.6, while their financial resilience eroded by nearly four points.
The gap between the top and bottom groups widened from roughly 18 points to about 21. This increase is almost entirely due to the bottom group detaching, not the top pulling away. One group is sinking while the other two hold steady. The erosion among consumers living paycheck to paycheck and struggling to pay bills is consistent with lower-income borrowers driving household debt delinquency to its highest level since 2017. The middle group is the “Costco economy.” They’re nervous but still spending, while the top continues to spend with confidence.
This is where the “K-shaped economy” label belongs. The “K” shows up in behavior. For example, New York Fed and Bank of America Institute data show spending and credit performance diverging by income since 2023. Sentiment surveys have flagged the steeper declines among lower-income consumers. What a sentiment reading doesn’t do is separate how people feel from whether they can act to shore up their finances. That is the PCEI’s contribution. It splits confidence from capacity, and in 2026, the two are moving in opposite directions. It also resolves three groups rather than two, showing a nervous middle between the steady top and the detaching bottom, closer to an “E-shape” than a K. The middle group is the most exposed to a price or policy shock.
Why the groups diverge: confidence versus capacity
The PCEI measures two things that most sentiment indices bundle together. Confidence is how consumers feel about the country and the buying climate. Capacity is whether they have the cushion, manageable obligations and income security to act on it. In 2026, the two are moving in opposite directions.
Between October 2025 and May 2026, every confidence item in the Index fell, and every capacity item held flat or rose. Consumers’ perceived job-loss risk improved 7.0 points, perceived peer-layoff risk improved 4.8 points and confidence in covering a $1,200 emergency improved 1.9 points. The overall Index slipped 1.1 points over the period, masking the decline in confidence and the capacity gain. The same pattern plays out across the three groups at different intensities, which is why they diverge.
The capacity gain, though, was concentrated in job security rather than the household balance sheet. The third driver, personal financial resilience, measures households’ financial cushion, debt manageability and savings ability. It held roughly flat in aggregate. That average hides the same divide. Resilience edged up for consumers not living paycheck to paycheck, but eroded by nearly four points for those living paycheck to paycheck and struggling to pay bills. The improvement was in how secure people feel about their income, not in the cushion behind it. That’s why the strain still shows up at the bottom, even as labor-market security rises.
Snapshot of PCEI subindices: labor-market security rising, financial resilience flat, confidence falling, overall index flat. Source: PYMNTS Consumer Expectations Index
What it means for consumer-focused businesses
- A single sentiment number bundles three diverging consumers into one and hides the channel, confidence or capacity that drives behavior. The practical consequence is that the same product or service offer can fail with one group and succeed with another. A useful rule of thumb falls out of the data: When capacity is the constraint, companies can win with pricing and discounts. When confidence is the constraint, they win with messaging and branding.
- Consumers who aren’t living paycheck to paycheck have a steady capacity and softer confidence. They can act and intend to keep acting. Their hesitation is about the country’s economy, not their own balance sheet. Discounting here leaves margin on the table. The lever is message and product, premium offerings, and experiences and reassurance, rather than price cuts.
- Those living paycheck to paycheck without struggling to pay bills are the nervous “Costco economy.” Capacity is holding but thinning, and behavior has already shifted toward value. This group is still spending and still winnable. However, it responds to predictability over persuasion: transparent total cost, budgetable bundles, loyalty and autopay, and clear value. It’s also the group most likely to trade down between brands, so retention matters more than acquisition.
- Consumers living paycheck to paycheck and struggling to pay bills are where the constraint is rising. This is the group where delinquency and missed bills are increasing. Forcing one-shot payments or stacking late fees converts a temporary liquidity problem into permanent customer loss. The better move is to reduce friction with flexible repayment, offer the ability to split payments or shift due dates, and provide earned-wage access and low-cost, short-term liquidity that keeps the customer in the system. The widening capacity gap here is constrained demand, not absent demand.
Conclusion
The lesson for merchants, banks and payments providers is that sentiment alone isn’t enough to explain consumer behavior. A weak confidence number can make the whole economy look fragile, while spending data can make it look stronger than it feels. The PCEI shows a more useful picture: Consumers are split by financial capacity. The strongest households need reassurance, the middle need predictability and value and the most strained consumers need flexibility before temporary pressure becomes permanent loss. The companies that understand those differences are better positioned to protect margins, retain customers and keep demand moving in an economy where the average consumer no longer exists.
About the Index
The PYMNTS Consumer Expectations Index is a monthly, survey-based index of roughly 2,000 U.S. adults per wave, weighted to national benchmarks and scored from 0 to 100, where 50 is neutral and higher readings are more positive. Its eleven core questions roll up into three subindices: personal financial resilience, which measures household capacity; macroeconomic and buying climate; and labor-market security. The readings are consumers’ own assessments and expectations rather than measured transactions. Data covers October 2025 through May 2026. External figures are drawn from the U.S. Bureau of Economic Analysis, the Federal Reserve Bank of New York, the Bank of America Institute and reporting by Bloomberg, CNN and CNBC.
