Why Income Gains Don’t Always Boost Spending

As the PYMNTS audience saw in Monday’s newsletter (March 2) there’s some wisdom to be gleaned from crowds.

The occasion was the launch of the PYMNTS Consumer Expectations Index, a new report that’s built to close the blind spots in legacy sentiment gauges, it blends confidence with capacity, adding balance-sheet resilience and labor-market security to traditional outlook questions to quantify whether households can translate optimism into spending. The debut data shows why that matters as overall sentiment sits above neutral, yet structural constraints keep discretionary spend in check. In other words, confidence without capacity doesn’t convert into spending.

The debate over what makes a workable index in this area is worth having, even after the inaugural index is in the market. Consumers, taken together, frequently anticipate structural shifts in spending patterns before economists and policymakers do. Their collective judgment has not only signaled macro turns, but it can help dictate the strategic initiatives of the firms that depend on them—if those firms, banks, financial services players and merchants pay attention to the right signals.

Karen Webster ’s Thursday (Feb. 26) analysis, “ The Three Blind Spots in How Consumer Sentiment Is Measured ,” documented this pattern across cycles. During the pandemic, consumers projected longer shutdowns and delayed recoveries than official forecasts. They anticipated persistent inflation when policymakers described price pressures as temporary. They signaled that tax refunds would shore up balance sheets rather than fund discretionary shopping.

The University of Michigan ’s Index of Consumer Sentiment dates to 1946, and other measures are decades old, so it’s time for a fresh set of eyes and ears to help business leaders anticipate what’s next, rather than simply react to what’s happened.

Introducing a Structural Lens

Against this backdrop, the PYMNTS Consumer Expectations Index, is a monthly, U.S. census-balanced survey of more than 2,000 U.S. consumers. It maps consumer sentiment across 11 dimensions on a scale of 0 to 100, with 50 representing neutrality.

As PYMNTS Senior Research Analyst Matt Albrecht, Ph.D., and one of the index’s architects, explained, the PCEI is a monthly index that translates consumer sentiment into something more urgent, namely, “a business-usable signal” that’s formed by “separating what people feel from whether they have the capacity to act, so leaders can anticipate when confidence will or won’t convert into spending.”

Why Now

Albrecht framed the timing in structural terms rather than cyclical ones.

“Consumer behavior is being shaped as much by constraints and perceived income risk as by headlines,” he said.

PCEI is designed to measure those mechanisms directly, so leaders aren’t surprised by a double whammy, in the form of “a ‘stable consumer’ who still won’t spend.”

Albrecht was explicit about the difference between traditional measures and this approach.

“Classic measures capture mood; PCEI adds the constraints, cushion, obligations and income continuity risk that determine behavior.”

That distinction transforms sentiment from a descriptive statistic into a diagnostic tool.

Confidence Versus Capacity

“People can feel optimistic and still behave cautiously if they don’t have room in their budget to take risks,” Albrecht said. “Confidence is ‘how I feel about the outlook’; capacity is ‘can I maintain or increase spending or absorb a shock and still pay my bills,’ and spending responds to both.”

This split clarifies why income growth has not uniformly translated into discretionary spending.

“Income alone increasingly fails to explain spending without understanding liquidity, fixed obligations and debt pressure,” he said.

In short, having the paycheck hit the bank account is not what leads us to open the purse or wallet, or in this day and age, click the buy button.

The governing variable is what Albrecht termed financial structure.

“Two households with the same income can have totally different spending behavior depending on cash buffer, fixed monthly commitments and whether a surprise expense forces borrowing,” he said.

In that formulation, macro data describes averages; the index interrogates constraints.

From Data to Decision

The PCEI is not intended to supplant established barometers.

“Economists use sentiment as a broad macro barometer; business leaders need a diagnostic tool that explains who is constrained, why and what will move behavior,” Albrecht said.

For payments providers and financial services firms, the applications are concrete.

“A widening confidence capacity gap is a signal that demand isn’t dead, it’s constrained,” Albrecht said.

That’s where liquidity tools win: flexible repayment, earned wage access, bill management, and low-friction, short-term credit that reduces the penalty for timing mismatches, without pushing consumers into high-cost revolving debt.

When strain rises, Albrecht advised operational adjustments.

“Three levers” can make all the difference, he said. “Reduce surprise, reduce peaks, reduce penalties. That means tighter price architecture, options to split payments or shift due dates, and softer late-fee structures that preserve recovery without triggering churn.”

The strategic insight is not to conflate caution with disengagement.

“Treat caution as a segmentation signal, not a disengagement signal,” he said, adding that firms should emphasize predictability and transparency over blanket discounting.

The PCEI suggests that expectation, in isolation, is insufficient. Expectation, constrained or enabled by financial structure, determines whether revenue forecasts materialize.

As Albrecht advised users of the PCEI through the months that follow: “When capacity falls, win with terms; when confidence falls, win with message.”