Services Carry the Economy While Shoppers Skip Big Purchases

U.S. consumers are still spending, but their paychecks are having a hard time keeping up.

The latest Bureau of Economic Analysis (BEA) data, released Friday (March 13), shows that income growth picked up in January and inflation remained relatively contained. Spending continues to outpace income in real terms, while overall economic growth slowed sharply at the end of 2025. The result is an economy that is expanding, but with consumers carrying much of the momentum while managing rising costs and limited financial buffers.

January’s personal consumption expenditures (PCE) data shows a consumer economy still moving forward, but with signs of strain beneath the surface.

Personal income rose 0.4% for the month, continuing a steady trend after increases of 0.3% in December and 0.4% in November. Compensation growth accelerated to 0.5%, while asset income, particularly dividends, jumped 1.2%. Disposable income rose faster, climbing 0.9%, largely because personal taxes dropped 3.2%, a seasonal shift often tied to withholding changes.

Consumers spent that additional income quickly. Personal consumption expenditures rose 0.4% for the month, matching December’s increase. The composition of that spending reveals a familiar pattern in the post-pandemic economy: services continue to dominate, especially necessities like housing and healthcare. Spending on services rose 0.7% in January, while goods spending fell 0.4%. Durable goods purchases dropped 0.7%, suggesting households are pulling back on larger purchases.

Inflation remained moderate but persistent. The PCE price index increased 0.3% for the month and 2.8% year over year, while core PCE rose 3.1%. Services prices climbed 3.5% annually, outpacing goods prices, which increased 1.3%.

When adjusted for inflation, the imbalance becomes clearer. Real disposable income is up 1.8% year over year, while real consumer spending is up 2.4%. In other words, consumers are still spending faster than their incomes are growing.

At the broader economic level, growth slowed sharply. Friday’s data showed that GDP increased at an annualized rate of just 0.7% in the fourth quarter of 2025, well below the 4.4% pace recorded in the third quarter. Declines in government spending and exports drove much of the slowdown, while consumer spending and private investment continued to support the expansion.

The Affordability Gap Behind the Numbers

These data points highlight the widening gap between economic resilience and financial comfort.

The recently released PYMNTS Consumer Expectations Index (PCEI), which measures not just consumer sentiment but also their perceived ability to spend, found that how Americans feel has a lot to do with their financial lifestyle. Households not living paycheck to paycheck maintain relatively positive feelings, while consumers struggling to pay bills remain deeply negative about their financial position.

At the same time, Americans broadly report feeling confident about their ability to manage debt but less certain that their overall financial position is improving. That combination supports steady spending in the near term but leaves households with less cushion if conditions worsen.

Looking at affordability specifically can help explain why the macro data can look healthy while consumer sentiment remains uneasy. Rising prices for everyday necessities like groceries, housing, insurance and transportation have fundamentally changed how households think about spending decisions. Affordability conversations used to revolve around discretionary choices such as vacations or large purchases. Today, they increasingly center on managing cash flow and covering essentials.

The January income and spending data reinforces that reality. Paychecks are growing and inflation has cooled from its peaks, yet spending continues to run ahead of income in real terms. For businesses watching consumer demand, that dynamic suggests the same pattern PYMNTS research has been tracking for months: resilient spending, but with increasingly thin financial margins supporting it.