Jobs Are Being Lost. So Are The Expenses. That's A Problem

People walk with shopping bags along Broadway in New York City on February 27, 2026. -Spencer Platt/Getty Images

One of the main pillars supporting the US economy, consumer spending, may be starting to crack.

For years, a resilient labor market has kept Americans from cutting back on spending despite lingering fears about the direction the economy will take. People’s dollars contribute to two-thirds of economic growth. A booming U.S. stock market has also helped boost spending, especially among wealthier households who are more likely to have financial investments.

That solid foundation that supported spending is now under pressure.

On Friday, the Bureau of Labor Statistics reported that employers shed 92,000 jobs last month, while the unemployment rate rose from 4.3% to 4.4%, continuing a painful stretch of sputtering job growth. Meanwhile, all three major stock indexes fell in morning trading as President Donald Trump said he will not end his war against Iran unless the Middle Eastern adversary agrees to an “unconditional surrender.”

That’s because spending itself is already going through a rough patch: Retail sales fell 0.2% in January from the previous month, the Commerce Department said Friday, the biggest decline since May. According to a poll among economists from data company FactSet, January’s outcome was below expectations of 0%. The figures are adjusted for seasonal fluctuations, but not for inflation. The report was postponed for a few weeks due to last year’s government shutdown.

A continued streak of weak or declining spending — possibly caused by lower stock prices, rising unemployment or a combination thereof — would spell trouble for the U.S. economy. Investors and Federal Reserve policymakers are also grappling with the impact of AI on the labor market, the full extent of which remains to be seen, although one major tech company recently cited AI as the primary reason for cutting half of its workforce.

For now, however, economists widely expect that higher tax revenues this year will boost spending in the first half of 2026 and offset risks to spending.

“While weather may once again negatively impact retail sales in February, this period will likely be an aberration amid a still-solid consumer outlook,” Ben Ayers, senior economist at Nationwide, wrote in commentary issued Friday. “Federal tax refunds will be nearly 20% higher than in 2025, which should help fuel renewed purchasing behavior this spring.”

Americans have not cut spending in 2025, despite President Donald Trump’s tariff hikes, continued pessimism about the economy and the weakest year for post-recession job growth since 2002.

Although the unemployment rate remains relatively low and new claims for unemployment benefits have not increased, it remains to be seen whether the labor market will remain stable – or worsen – in 2026. That’s important because if Americans are thrown out of work, they could be forced to cut spending, economists say, hurting companies’ profits and triggering more layoffs.

Several surveys and polls show that Americans today are still frustrated with the higher cost of living. That’s especially true for low-income households, which have seen their wages lag behind those of high-income earners in recent months, according to data from the Federal Reserve Bank of Atlanta. Lower- and middle-income Americans have also leaned more heavily on credit cards and other loans in recent months, New York Fed data shows.

That illustrates America’s rising economic inequality in recent years, an issue some economists call the “K-shaped economy.”

In addition to slowing wage growth and greater dependence on debt, low-income Americans are less likely to have financial investments, meaning they missed out on last year’s stock market gains.

The rise of AI has thrown a wave of uncertainty over the labor market. While there is some data to suggest that AI is not yet disrupting employment, layoffs at major tech companies, improvements in AI models, and viral essays warning of an AI-induced jobspocalypse have increased concerns.

Block, the parent company of payment services Square and Cash App, became the poster child for these fears last month when it said it has cut 40% of its workforce because intelligence tools have “changed what it means to build and run a business.”

Engineering work has been at the center of the discussion about AI and jobs, as the technology has allowed software developers to speed up parts of the coding process. A Google survey from September found that 90% of tech workers use AI for tasks like writing and modifying code.

But companies like Anthropic are now trying to replicate that success in other areas of office work. The company has upgraded its popular Claude Assistant to better handle human resources, design, legal, finance and cybersecurity tasks, putting its software inventory to the test.

Some experts say the rhetoric surrounding AI’s current capabilities is exaggerated, although there is consensus that AI will change the game. It’s just unclear how and when — and that uncertainty likely makes it difficult for companies to make hiring decisions.

Oren Etzioni, professor emeritus at the University of Washington and former CEO of the Allen Institute for Artificial Intelligence, previously told CNN that there are “real and appropriate concerns” about AI’s impact on jobs. But he expects major changes to happen over the course of the decade, not in the short term.

“As we think about the next decade, we will see a very different world than we have today,” he said.

Last year, America’s wealthiest spent money at a rapid pace, boosted in large part by a resilient U.S. stock market and rising home values.

Moody’s estimated that the top 10% of U.S. earners would account for about half of consumer spending by early 2025. The stock market ended 2025 with a third straight year of double-digit gains.

But that could change if the war in the Middle East continues to weigh on major stock indexes. On Thursday, the Dow Jones closed 785 points (1.61%) lower, while the S&P 500 fell 0.56% and the tech-heavy Nasdaq fell 0.26% – all while oil prices soared.

The losses extended into Friday when Trump hinted that his war against Iran will not end anytime soon.

“With the stock market under pressure in recent months, the significant boost to high-income household spending from rising wealth in the stock market has disappeared,” Michael Pearce, chief U.S. economist at Oxford Economics, wrote in an analyst note on Friday.

CNN’s Lisa Eadicicco contributed reporting.

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