By Phillip M. Perry
Tapped out low- and middle-income shoppers, sluggish employment and lackluster housing turnover will challenge retailers in 2026. Helping to smooth things over will be robust buying by high-income consumers, lower interest rates and beneficial tax-related legislation from Washington. As population growth slows, retailers will need to double down on smart tactics to boost productivity.
Retailers should prepare for a difficult operating environment in the coming months. “Our forecast for year-over-year retail sales growth is 3.8 percent for 2026, down from the 4.5 percent of 2025,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics.
One reason for the expected softening in sales is that low- and middle-income consumers are expected to pull back after a round of defensive spending. “Consumers have been hearing that prices will be going up, so they have adopted a buy-now-instead-of-later mentality,” says Hoyt. Once their cupboards are full, there is less desire to shop the aisles. “This practice is a negative for the retail outlook.”
Tariffs and uncertainty have dampened consumer confidence. And that has kept retailers from raising shelf prices. “It’s hard to say who is eating that, whether it’s importers, retailers or wholesalers,” notes Hoyt, speaking of the costs of the nation’s trade policy.
Upper income consumers, on the other hand, should continue their aggressive shopping. A robust stock market and a steady if unspectacular economic environment is fueling the fire. “The U.S. economy is holding up admirably well despite a major trade shock caused by tariffs,” says Bernard Yaros Jr., lead U.S. economist at Oxford Economics. “We look for an acceleration in growth in 2026 as stimulus from the One Big Beautiful Bill gets underway.”
Oxford Economics expects real GDP to grow by 2 percent in 2026, up a bit from the 1.7 percent expected when 2025 numbers are finally tallied. Both years, among the most sluggish growth environments of the past decade, are underperforming the 2.8 percent increase of 2024. (Gross Domestic Product, the total value of the nation’s goods and services, is the most utilized measure of economic growth. “Real” GDP subtracts the effects of inflation.)
Weak Employment
Strong employment figures are a traditional booster of consumer confidence and retail sales. The current reports, though, can be misleading. Oxford Economics forecasts an unemployment rate of 4.4 percent and 4.3 percent at the end of 2025 and 2026, respectively. That’s not much higher than the 4.1 percent clocked at the end of 2024. It’s also well within the 3.5 percent to 4.5 percent range many economists peg as the “sweet spot” that balances the dual risks of inflationary wage escalation and economic recession. (The lower the unemployment number the greater the risk of inflation; higher numbers threaten a recession.)
The nation’s current immigration policy, though, casts some doubt on the traditional interpretation of those unemployment numbers. “What is happening is that job creation has come to a near standstill,” says Hoyt. “In most environments that would result in a significant increase in the unemployment rate. However, because of the restrictions on immigration, we have almost no labor force growth. So, the unemployment rate is barely rising even though the number of job openings has plunged.”
In other words, the labor market is much weaker than the unemployment rate would lead one to believe. Employers are reluctant to hire because of uncertainty about the economy. People are finding it tougher to find jobs than the reported numbers would suggest, putting a damper on consumer confidence and retail sales.
As a result of the general employment malaise, shoppers will have less disposable income to spend. Moody’s Analytics expects the nation’s total wage and salary income to increase by 4.3 percent in 2026, a lower rate than the 4.9 percent of 2025. Both numbers are below the 5.8 percent clocked in 2024.
Higher Profits
The nation’s economic growth depends largely on the launch of new business initiatives. Unfortunately, companies are holding back for several reasons. Interest rates, while declining, are still at the highest levels since 2022. Costs for materials and supplies are increasing. There is uncertainty about the nation’s future trade policy. Low- and middle-income consumers, nervous about inflation, are tapped out and closing their wallets. Against such headwinds, a host of otherwise attractive projects can look less promising.
One might also expect business profitability to suffer. Yet Oxford Economics expects it to follow the same general pattern as the GDP. “We look for corporate profits to rise by 4.9 percent in 2026,” says Yaros. “That’s up substantially from the 0.5 percent expected when 2025 numbers are finalized.” Even so, the 2026 pace remains slower than the 7.9 percent clocked in 2024.
The expected 2026 rebound in profitability stems from a belief that stimulus from Washington will lift all boats. “We believe the passage of the One Big Beautiful Bill, with its tax cuts for businesses and households, should help the economy regather some steam in early 2026,” says Anirban Basu, chairman and CEO of Sage Policy Group. The legislation’s 100 percent bonus depreciation should help fuel business investment, while large tax refunds should invigorate consumer spending. Both activities are important drivers of the nation’s economy.
This stimulus from Washington is arriving at the same time companies are getting a more solid footing on the nation’s shifting trade policy. “There has been a bit of a shock to the system in and around tariffs over the past year, and it is taking some time for many operators to understand their impact,” notes Andrew Petryk, senior managing director at Brown, Gibbons Lang & Company, an investment banking firm.
Specifically, importers have responded to China tariffs by sourcing from other countries—a shift that has also helped ease the nation’s recent supply chain ills. “Lead times have diminished as companies have found alternative or additional suppliers,” explains Petryk. “Those that relied on one or two vendors now have three, four or five.”
Companies should also benefit from a decline in the cost of money over the coming months, as the Federal Reserve shifts its focus from fighting inflation to bolstering employment. “We look for inflation to peak at just above 3 percent when 2025 numbers are finalized, and for the Fed to cut interest rates into 2026 until the federal funds rate falls to about 3 percent,” says Yaros. That rate, while much higher than the rates of early 2022, is a considerable improvement over the 4.3 percent of mid-2025.
Housing Doldrums
Retailers tend to do better when the housing sector is thriving. And here, the picture is murky. “Housing is in a funk,” says Yaros. “Single-family homebuilders are contending with a growing supply of unsold, completed new homes, as well as greater competition from the resale market and falling home prices in a rising number of regions.”
The high cost of money is not helping matters. “A significant increase in interest rates since the summer of 2022 has increased the monthly payments required from buyers of new or existing homes,” notes Petryk. “They have also led to a significant market shortage because families who bought homes three to five-plus years ago are loath to surrender their sub-3 percent mortgages.”
Mortgage rates have an important impact on the consumer attitudes that are vital drivers of the economy. While lower short-term rates may be coming from the Federal Reserve, it’s unclear how much effect they will have on the longer-term ones that apply to the funding of new homes. “I do not forecast mortgage rates coming down enough to make a big difference in single-family construction,” says Bill Conerly, a business-focused economist and consultant.
Wary builders. Reluctant sellers. Sluggish buyers. It’s all influencing the housing market. Oxford Economics expects housing starts to fall by 4.3 percent in 2025 and by another 2.3 percent in 2026, after dropping by 3.5 percent in 2024. Prices for existing homes are projected to rise just 1.5 percent in 2025 and 2.3 percent in 2026, after a 4.4 percent increase in 2024.
“The fact that there’s not a lot of housing turnover can impact retailers, because when people buy or sell a home they tend to purchase a lot of furniture, appliances, paint and so on,” says Hoyt. “A lot of people are locked into their existing homes because they don’t want to replace their low percentage mortgage with a higher one. That’s reducing housing turnover.”
Business Confidence
For all business sectors, money and labor are not the only production factors on the rise. “The real problem is the world has become much more expensive in the last few years,” notes Basu. “Construction materials are more expensive. And of course there are tariffs on items like steel, aluminum and copper.”
Little wonder the high cost of doing business is top of mind for many operators. “As we head into 2026, the area of most concern for companies is profit margin,” says Basu. “Many operators are simultaneously experiencing an increase in costs of delivering services while demand fades.”
Given the variety of business concerns, many projects are being put on hold. “It’s hard to engage in cost savings when both materials and labor are becoming more expensive,” explains Basu. “Too often, the pro formas don’t pencil out. Many companies are responding by not expanding their operations and trying to trim expenditures at the margins. They are focusing more on cash flow preservation by slowing hiring, and being less aggressive in leasing and purchasing equipment, particularly equipment impacted by tariff pricing.”
The numbers bear out this broader sense of business hesitation. “We look for business investment to increase by only 1.6 percent in 2026, after rising by 3 percent in 2025 and 3.6 percent in 2024,” says Yaros.
Looking Ahead
As we enter the early months of 2026, economists suggest watching these key economic indicators for an idea of how the year will turn out:
Employment: “I would pay close attention to the unemployment rate,” says Yaros. An unexpected decline in employment would spur faster interest rate cuts as the Fed seeks to reinforce economic expansion.
Consumer spending: “How is the consumer faring?” poses Basu. “Bear in mind that many low- and middle-income people are exhausted financially. Indebtedness and delinquencies are up for credit cards, mortgages and loans.”
Inflation: “If we get stubbornly high inflation, that will prevent further progress on interest rates,” says Basu.
Oxford Economics still expects the nation to avoid a recession, and the expected 2 percent GDP growth is right around the level economists peg as the nation’s “natural growth rate”—one that supports business activity, helps maintains full employment and avoids triggering inflation.
“Retailers are most worried about how much they are going to have to pay for the goods they’re selling, and what that will do to consumers’ purchasing power,” says Hoyt. “They are also worried about how weakness in the labor market will weigh on aggregate income growth. And finally, they are worried that a pullback in the stock market will dampen spending by high income consumers.”
Perhaps of even greater importance, though, is a little heralded threat to productivity. “One thing that sort of permeates the whole economic picture right now is the nation’s low population growth rate,” says Conerly. “Immigration is down, due to Trump administration policy. The next generation entering their working years is about the same size as the retiring boomers, so there will be no net growth in the labor force.”
Responding to this trend, retailers will look for ways to maximize their return on labor by increasing output per worker, notes Conerly. “The focus of businesses in 2026 will be increasing productivity—not by whipping people harder, but by providing them with better tools, better training and better first-level managers.”
