The State of the Consumer: Resilient, Selective, and Still Spending

00:22, Chris Thonis

Hi everybody and welcome back to William Blair Thinking Presents. Today is Thursday, August 20th, 2026.

I am joined by Sharon Zackfia, William Blair's group head of consumer research, along with consumer analyst Dylan Carden.

Sharon and Dylan, thank you very much for joining us.

00:37, Dylan Carden

Thank you.

00:37, Sharon Zackfia

Thank you.

00:38, Chris Thonis

Today we're discussing the 2026 edition of your State of the Consumer report, which takes a look at the key forces shaping consumer behavior, spending patterns, inflation, and retail demand heading into the second half of the year.

One of the report's central conclusions is that the consumer remains surprisingly resilient, but the story underneath the surface is becoming much more nuanced.

So, Sharon and Dylan, thanks for taking the time to walk us through it.

I figured we could start at the highest level and maybe, Sharon, you can kick us off.

But despite headlines around inflation, higher energy costs, geopolitical uncertainty, consumer spending has held up better than many expected.

So, when you take a step back and look across the landscape today, what's the biggest takeaway for investors trying to understand the state of the consumer?

01:20, Sharon Zackfia

Yeah, sure. And thanks for having us.

You know, I think certainly when gas prices spiked in March, that unlocked a lot of anxiety among investors as to what that meant for consumer spending. And I think what has been really surprising, you know, so far through August, has been how resilient the consumer has been.

So we have seen the retail sales growth, excluding auto and gas, kind of maintain at its 20-year average since that gas spike increase, which has been encouraging.

Now, that doesn't mean that all consumers are created equal. And I think one of the things that we always talk about in our group is how complex the consumer is, right? You're talking about well over 300 million US consumers. Obviously multiples of that when we think about international, as well, and there's no single variable analysis. I think this gas dynamic has kind of proved that out as we've been throughout 2026.

I think we're also in a situation where I would argue, since the post-pandemic years have kind of flowed, where you're just seeing more winners and losers.

So macro isn't defining everything across the consumer landscape, as maybe it felt like it did in 2020, 2021, 2022, and part of 2023. So, when we see things like consumer sentiment, and then we actually see the data that comes in, there's often a mismatch.

And even when we do our own survey data, we have found that consumers are very bad at predicting what they're going to do, but they're very good at saying what they actually did do.

And I think that is part of what we're seeing as well when we see these sentiment measures come out. But then we see the sales numbers come out, and that they're holding up very, very well.

03:09, Chris Thonis

In the report, you argue that while investors continue focusing on gas prices, the bigger issue may be broader inflation fatigue built up over the last several years.

So, Dylan, maybe this is more a question for you. How are consumers adapting to that environment? And where are you beginning to see pushback against higher prices?

03:28, Dylan Carden

Yeah, and I think to Sharon's point, you know, historically we've been trained to focus on certain things as it relates to consumer, and it's just a more dynamic landscape.

So, two or so months ago, our inbound, kind of, started spiking on this sort of broad idea that the Iran war would end, gas prices would come down, and the consumer would continue to be resilient.

And the context there, of course, was that everyone has been a woefully underinvested or underweight consumer for much of this year. And, kind of looking at drivers of behavior, gas prices actually don't explain a lot as it relates to retail sales. It's hard how you can kind of cut the data in different ways, but sort of suffice it to say, we don't see a strong correlation between month to month or sequential moves and gas and spending.

So, what we think is more impactful, and something that you're starting to kind of see, I think, show its face in second quarter earnings, in particular, is the cumulative inflation in certain categories that historically have had limited to no pricing power.

So, we cover, I cover apparel, in particular. And so, apparel between 2022 and 2024 saw cumulative inflation of 11%.

And that's not an egregious number on its face. But if you consider that that is in the context of 30 years into the pandemic, where pricing power, i.e. cumulative inflation, was literally zero, and that that has been happening for a lot of other discretionary categories for the last four years writ large.

You know, it bears mentioning that that could be having an impact as you run into 2025 and 2026, where we start to see companies, again, trying to pass through higher input costs.

And our contention is that consumers, which has really been handling a lot of this by drawing down savings, if you look at 2025, is finally starting to show cracks. And why that would be happening now versus, you know, it was a very strong first quarter. You know, you saw real wage growth kind of dip negative towards the end of spring.

So, it's not to say that there's some existential threat out there or the consumer is about to fall off a cliff. But to Sharon's point about winners and losers, you know, you are seeing pockets.

You know, TJX just reported and saw some softness in their Marmaxx division. Walmart saw their slowest comp in the US. You know, you're seeing some signs that again, both those companies still comp to 3% to 4%.

But where the expectations, or where the incremental expectations are, perhaps there needs to be some alignment. And we think a lot of what explains that has been more pockets of inflation in different parts of the economy.

05:52, Chris Thonis

So, another major theme is the widening gap between higher income and lower income consumers.

And we've heard about the K-shaped economy for years. But your report suggests it's becoming even more pronounced. So how should investors think about that dynamic? And, you know, what does it mean for consumer-facing companies today?

06:12, Sharon Zackfia

Yeah, sure. So there's been an ongoing evolution to this being a top-heavy economy, where the higher household income bracket is making up a disproportionate amount of retail sales in the US.

And this isn't something that just started happening in 2026, it's been, you know, well over a ten-year-plus phenomenon.

I think it is probably getting more attention currently because a lot of what has been happening over the past, let's say two and a half years, has kind of a disproportionate impact on the lower income consumer.

So it's been, I think, a little bit less about that higher income consumer, you know, getting better, as it's been more about "Gee, a lot of what we talk about hurts that lower income consumer."

So whether it's gas prices, which, you know, fundamentally just take up more of the lower income consumer wallet, broader inflation, housing, the end of pandemic-related stimulus.

I mean, all of that hurts the lower household income demographic.

And I mean, fundamentally, that's always just a tough demographic to begin with, right? If anything good happens to a consumer, they're probably no longer in the lowest household income demographic.

So, fundamentally challenged, a lot of the inflation is hitting there harder. And it has translated to, you know, concepts that focus on higher household incomes, you know, being more resilient in this environment.

That said, you know, I don't want to make it sound as if this is, again, kind of, as black and white as it sounds. So there are companies like CAVA, which are seeing lower income consumers make up one of the fastest growing customer cohorts.

And CAVA is certainly a more aspirational, more expensive food option than some others that are more discount driven out there.

You can hear the same thing with brands like Chipotle or BJ's.

So, you know, there is price, and that's important. But there's also value. And value can manifest in what you're getting for that price, right? Whether it relates to the product itself or the service, you know, really, the whole package.

And we've also seen that the way that consumers think about value is much more complex, I think, in 2026 than it probably was ten years ago, taking into account all of those other aspects of the equation.

08:48, Chris Thonis

When you look across the consumer landscape, performance has been anything but uniform.

So, some categories appear to be accelerating while others are slowing. Where are you seeing the strongest demands right now? And where are you seeing the most pressure?

09:01, Dylan Carden

I mean, certainly again, back to apparel. People seek out value - like Savers Value, literally "value" in the title - did phenomenally well in the US.

And I think if you look at why, they're offering a $5 AOB, right? So it's really not something that you can totally put out of your budget if you need that item.

I think you've seen some softness across grocery related to price, and sort of a lot of these CPG companies early in the year, entered the year, even as early as the first quarter, talking about the need to lower price.

And so I think that's been sort of a pocket of weakness.

Home has been a bright spot. Home has been lost in the wilderness for a while. You know, on TJX's earnings last night, they continue to do extremely well. I think there's some other names that sort of seen something of a recovery, just given how long home has been weak.

But yeah, that's kind of what I'm seeing, at least. I don't know, Sharon?

09:59, Sharon Zackfia

Yeah. I mean, we have seen restaurant sales growth in aggregate accelerate as we've gone throughout this year.

So I think that has been a surprise to many investors, that we would see stronger restaurant same-store sales growth in the second quarter than the first quarter, even with higher gas prices.

I think part of that is kind of going back to price. We've actually seen restaurants taking less price on average in 2026 than they did in the years leading into the pandemic, and certainly during those pandemic inflation years. So the price-value equation relative to grocery is better now.

I mean, people do have to eat. They have to make that choice multiple times a day. And oftentimes, at this point, that gap has narrowed in favor of restaurants to a greater extent than it would have been a year or two ago.

And that's partly reflective of what the inflationary input costs are, which I know we're going to talk about in a minute. But if you just think about the cost of freight or oil and that element, there's a much bigger component of that cost structure that goes into grocery than that goes into restaurants.

So, grocery has to kind of eat a lot more of that inflation. Whereas restaurants' main cost inputs are typically labor and occupancy combined. And neither of those have really a relationship with where gas happens to be today, or freight.

So, the inflationary inputs for restaurants have actually been pretty favorable. They'll get more favorable as we go throughout this year, because we're starting to lap a spike in beef prices last year.

And so all of that is allowing restaurants, I think, really to much more effectively compete in this landscape than investors would have thought, you know, three or four months ago. You know, and as we look forward, I think there are lots of reasons why you would expect restaurant margins to improve more in the second half. Again, we're starting to lap peak kind of beef inflation.

So, the apples-to-apples becomes clearer in the back half of the year.

That will help margins kind of expand at a greater rate. So you'll get better sales flow-through, which I think is something that investors are kind of waking up to, as we've seen restaurant performance really tick up over the past few months in the stock market.

12:26, Chris Thonis

All right. So let's talk a little bit more about that. Investors seem increasingly focused on margins and earnings visibility. And, as you just mentioned and in the report, you highlight areas like transportation, freight, and commodity costs as emerging concerns.

What are the biggest cost pressures you're watching today? And how do you expect companies to navigate them?

And maybe Dylan, you can kick it off.

12:46, Dylan Carden

Yeah, you mentioned some of the big ones.

So, freight is one that people are increasingly speaking to as a headwind in the back half of the year. That one is pretty easy to understand. Both domestic trucking routes, intermodal, and obviously shipping costs are spiking again.

You know, the flip side of that is a lot of these companies are now getting windfalls from tariff refunds and lower tariffs generally, right?

I mean, on a comparable basis to where they got reset, sort of 10% to 15% versus on average 20%, at least speaking from again the soft lines space.

So it's not a total bad situation from an earnings standpoint. It depends on how you want to treat the tariff refund, of course.

I mean, most people will back that out and look at kind of underlying earnings, of course.

But from a pure cash flow standpoint, you know, a lot of these companies will have sort of the net equal amount of cash, given the sort of the offset and effects of those two things.

You know, labor has always been sort of a headwind.

Insurance premiums have been called out relatively repeatedly in the last couple of years as spiking.

But really, it's a story of how oil and more gas prices sort of trickle through the broader supply chain.

13:57, Chris Thonis

So, as we look toward the remainder of 2026 and into next year, what would you say are the key indicators you'll be watching most closely?

And are there any consumer trends or developments that you think have the potential to surprise investors over the next six to twelve months?

14:15, Sharon Zackfia

Yeah, I'll start off. I mean, I think in my space, you know, there was a lot of noise in 2025, and we're starting to lap more and more of that noise.

So if I think about kind of what happened in 2025 across the restaurant space, we saw lower income consumers weaken, we saw Hispanic consumers weaken, and then we saw younger consumers weaken.

And that younger consumer really started to weaken in the summer last year. So we're just starting to lap that. We'll lap a government shutdown, which was not great for restaurants, particularly where federal government employment is high.

So there are a couple of, I guess I would say, easy wild cards in the back pocket as we look at the next six months from a sales standpoint.

You know, obviously sales trump everything.

I mean, we can talk about margin input costs ad nauseum, but sales will, you know, solve a lot of problems.

I think as I look to the back half, I mean, we are really seeing, at least in the restaurant space and leisure space, a consumer that is willing to pay for a better experience, better quality — that trading-up dynamic that has been talked about for decades in the US is still very apparent in the services space, and I would expect that to continue.

You know, it's just very hard for brands to compete on price consistently in the restaurant space, because there's always an inflationary element in labor that you're having to, you know, eat in the restaurant space.

And so those companies, I think, always have kind of a tough situation in that they're competing on price.

And oftentimes that consumer that's buying just on price is the least loyal consumer.

So your tail on that price point, you know, competition is relatively limited.

16:15, Dylan Carden

Yeah. And then, I guess in soft lines, you know, separates over dresses is a major theme we're watching.

Again, I don't think there's sort of a broad weakening per se, but I think there's a broader incremental consideration, such that I think we have to be careful about, you know, where expectations are kind of coming into 2027 — particularly if blowout prices remain elevated.

Midterms, or elections broadly, kind of throw a wrench into my space generally, because marketing becomes that much less efficient and consumers' attention is dragged elsewhere.

So it's a bit of a wild card into the balance of this year.

And holiday, again — if we think that there's sort of a more cautious approach to price, you know, I think you could see a more promotional holiday. Certainly, you know, we're already hearing rumblings of higher promotions in the department store channel already.

Some of our specialty names have seen a jump in promotions in June, and more so July. So it's one that I think pays to have some caution.

And, you know, we can pick defensive names and brands that seem to be able to weather all seasons.

But we're watching real wage growth. We're watching that savings rate. We're watching broader inflation, listening to how companies are approaching, you know, guiding for the balance of the year as it relates to price, in particular, promotional cadence. Those are kind of some of the bigger things we're following.

17:38, Chris Thonis

Well, as we wrap up, this will be my last question. If investors remember one thing from the report, what should it be?

17:45, Sharon Zackfia

Yeah, I think for me, the consumer is resilient. But it's also a very selective consumer.

And the brands that we're seeing win are those that are more judicious with their pricing, that have not underestimated the consumer on what they want from a quality or service standpoint.

So they're delivering more. They're delivering it in a way that is more affordable, relative to, you know, perhaps some of the competition. And they're winning the traffic.

And at the end of the day, that's key to long-term brand building. That's where you get loyalty. That's where you get repeatable behavior, habitual behavior from the consumer. That's where you become part of the pattern. And I think those are really the keys that we look to for the long-term winners across the services space.

18:43, Dylan Carden

Yeah, 100% ditto.

I would just add, too, I think in our report specifically, really what we were trying to do is refocus the conversation away from gas specifically, onto, you know, some of the more tangible drivers of consumer behavior.

So, as you see gas prices come in, I'm not going to fight it. That's great. But, you know, just taking kind of a broader view. And some of the nuances that Sharon points out, I think, are important.

19:07, Chris Thonis

All right. Well, that's all the time we have for today. For those interested in the full report, it’s called State of the Consumer: The 2026 Edition, and you can request a copy by visiting WilliamBlair.com/Contact-Us.

Sharon, Dylan, thank you for joining. Thank you everybody else for listening.

19:23, Dylan Carden

Thank you, Chris.

19:24, Sharon Zackfia

Thank you.