Consumer confidence conundrum

US economic activity remains resilient despite a sharp deterioration in consumer and business confidence.

• August nominal retail sales rose 1.2% month over month, while control-group sales increased 1.4%, both above consensus expectations of 0.8% and 0.5% respectively.
• Back-to-school sales grew 6.0% year over year from June through August, the strongest pace in four years, while the author expects Christmas retail sales growth of 5.0%-5.5% and fourth-quarter GDP growth of 3.1%.
• Household spending is supported by wealth effects: the S&P 500 rose 14% in the first eight months of 2026 after gaining 86% over the previous three years, and existing-home prices reached $443,000 in June.
• Labor-market conditions remain supportive, with average payroll gains of 107,000 over the six months through August, unemployment at 4.1%, initial claims near a 57-year low and wage growth slowing to 3.1% year over year.
• Confidence indicators weakened, including the University of Michigan index falling from 55.2 in July to 47.8 in September and the Conference Board index declining to 89.4 in August; meanwhile, 10-year Treasury yields reached 5.15% amid inflation and Federal Reserve concerns.

Takeaway: The author expects consumption and growth to remain solid, but warns that deteriorating confidence, elevated equity valuations, geopolitical energy volatility and the approaching midterm elections could create an air pocket for equities.