The engine of the nation’s booming recovery from the COVID-19 recession is losing some horsepower.

Household income growth is slowing and likely to downshift further the next few years, posing risks for consumer spending and the broader economy, forecasters say. The development is amplified by inflation, which has stayed elevated recently after easing significantly following a pandemic-induced spike.

That’s giving Americans less purchasing power.  

By itself, the pullback in household income growth isn’t expected to tip the U.S. into another recession. But it could make the nation more vulnerable to a downturn if President Donald Trump’s widening trade war or an unforeseen shock – such as an oil crisis – dramatically weakens growth, said economist Scott Hoyt of Moody’s Analytics.

While a slowdown in Americans’ average wage growth is the main reason for the drop-off in overall income gains, other cash wellsprings such as company profits, corporate dividend payouts and bank interest payments are also throttling back.

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“It seems like all of the key drivers of household income growth are providing less support than they have in the recent past,” Hoyt said.

That’s a concern, he said, because income powers consumption, which makes up about two-thirds of economic activity.

How much has the average household income increased?

U.S. household income grew a robust 5.5% last year but it’s expected to increase just 4.25% this year and 4% by 2028, according to the U.S. Bureau of Economic Analysis and Moody’s forecasts.

Meanwhile, inflation tumbled from a 40-year high of 9.1% in mid-2022 to 2.4% in early fall but has crept back up to 3% in recent months, the consumer price index shows. That’s well above the Federal Reserve’s 2% goal.

The biggest victories in the inflation battle already have occurred, Hoyt said. Further progress is likely, he added, but will play out more slowly, especially with Trump’s plans for tariffs on a wide range of imported products pushing prices higher.

After adjusting for inflation, household income grew 2.9% last year, down from 5.1% in 2023, and it’s expected to increase 1.8% this year, government and Moody’s figures show. Annual gains are likely to hover around 2% through 2028, Moody’s estimates.

Is inflation getting any better?

Although inflation generally has been easing, most Americans say they’re still not feeling it.

Sixty-five percent of those surveyed say their income is falling behind inflation, according to an online poll of 1,085 adults earning $30,000 to $130,000, conducted in late December by Primerica, a financial services firm.

“For too many middle-income Americans, the rising cost of everyday essentials is still making it hard to get ahead,” said Primerica President Peter Schneider.

'It's getting worse'

“It’s getting worse,” Detroit resident Pat Baldwin, 59, said of inflation. “Food is still very high. Clothing is still very high.”

She also cited her gas and electric bills, which she estimates have risen 30% to 40% the past few years. In January, natural gas bills in the U.S. were up about 5% from a year earlier, well above inflation overall, according to the Bank of America Institute, which studies consumer behavior.

Meanwhile, Baldwin, who works as a program manager for a nonprofit that holds classes and workshops for seniors, gets small raises sporadically and hasn’t received a bump in two years.

She and her husband traditionally have traveled by Amtrak for vacations in cities such as San Diego, New Orleans and Chicago. But with the cost of both the Amtrak rides and hotel stays rising about 50% the past few years, Baldwin said the couple no longer book a sleeping berth on the train and have shortened their hotel stays from five nights to three.

“It’s just so costly,” she said. “I’m just in awe of it.”

Is consumer spending going up?

Across the U.S., such perceptions are translating to softer consumer spending. After growing 2.8% in 2024 and a projected 3.1% this year, household outlays are likely to increase less than 2% yearly through 2028, according to Moody’s.

What is the current economic growth rate?

As a result, the economy, which grew 2.8% last year, is forecast to expand by 2.3% in 2025 before slowing further the next three years, according to Moody’s.

A look at how income growth is slowing:

Wages

After growing about 6% annually in early 2022 amid widespread pandemic-related labor shortages, average hourly pay increased 4% in January compared to a year earlier, Labor Department figures show. Yearly gains are projected to slow to 3.7% this year and 2% in 2028, Moody’s predicts.

For nearly two years, inflation outpaced average pay raises. But since May 2023, that dynamic has flipped, giving consumers more buying power. In recent months, however, that gap has narrowed and Moody’s reckons it will continue to shrink. Inflation-adjusted pay grew 1% in January, down from 1.5% in September, Labor figures show.

Hoyt traces the drop-off to a slowdown in hiring following a post-COVID-19 rebound as well as the fading of pandemic-related labor shortages.

The Trump administration’s projected layoffs of several hundred thousand federal workers are expected to toss more job seekers into a cooling labor market with fewer openings, forecasters say.

Randy Price hopes he's not among them.

For about two decades, Price, who lives in Cincinnati, worked as an information technology specialist but earned a relatively modest $15 to $20 an hour because he never received certifications. As rent and grocery costs crept higher a few years ago, Price got annual raises of about a dollar an hour.

“It was just hardly a blip,” he said.

Price downsized to a smaller apartment, shaving his rent from $1,200 to $750. He also started dining out twice a month instead of weekly.

“To be able to make ends meet is really hard,” he said.

About 18 months ago, he got a job as a tax examiner for the Internal Revenue Service, trimming his pay slightly to $19 an hour but providing much better benefits and the opportunity to move up.

But with reports this week that the IRS will be laying off more than 6,000 workers as part of the sweeping federal layoffs, Price said he’s worried about his job security and will be even more cautious with his spending, eating out just monthly.

“I’m very concerned,” he said.

Interest income

As inflation has eased, the Fed has been cutting interest rates but paused in January. Lower rates help borrowers but hurt seniors and other savers who rely on interest income from their bank accounts. Top bank savings rates have fallen to about 4.5% from more than 5% in 2023, according to Bankrate. Rates are expected to continue to edge down as the Fed resumes its rate cuts.

Total yearly interest income across the U.S. is roughly flatlining after growing nearly 20% in 2023, according to the Fed, BEA and Moody’s.

Company profits

While consumer spending growth has moderated, labor costs are still high, squeezing the profits of small business entrepreneurs and other companies.

Overall corporate profits dipped in the third quarter of 2024 and are projected to have fallen more sharply in the fourth quarter, Hoyt said. They’re “expected to continue to drift lower this year before turning modestly higher,” Hoyt wrote in a report.

Dividends

Many Americans receive income through dividend payouts from stocks. But as company profits narrow, dividend payments have been flat since late 2023 after rising sharply for more than two decades, according to BEA and the Federal Reserve Bank of St. Louis.

Rent

Rent is a small part of total household income but an important piece for people who rent out houses, apartments and commercial spaces.

Annual rent increases peaked at 8.8% in early 2023 due to a COVID-19-related run-up but slowed to a nearly three-year low of 4.2% in January, providing less income to property owners.

The stock market

Another factor that could curtail consumer spending is the frothy stock market. Rising stock prices don't necessarily provide income but they do make Americans feel wealthier, prompting them to spend more

Yet by some key measures, stocks are overpriced, with S&P 500 shares valued at 30 times earnings over the past 12 months, nearly double the historic average, said Moody's Chief Economist Mark Zandi.

"If asset prices continue at the very least to hold their own, the wealth effect will fade, and consumer spending and overall growth will moderate," Zandi wrote in a report.

The effects of a global trade war that hammers corporate profits could mean a bigger blow to stocks and consumer spending, he said.

What's the bright side?

There's also a more optimistic outlook. The U.S. economy has repeatedly defied doomsayers since the pandemic and could continue to do so, Hoyt said. For example, if growth in productivity, or output per worker, keeps rising rapidly, "that would lift both compensation and profits to the benefit of household income," he wrote.