Like mythological Atlas, U.S. consumers carry a lot on their shoulders.
The consumer has played a pivotal role in stabilizing the economy, particularly during the last decade. Today, as tariffs and elevated trade policy uncertainty weaken business investment (as our last article discussed)—and since tariffs are import taxes that fall primarily on consumers, whose spending growth has already weakened—the almighty consumer is at the core of next year’s economic outlook.
The key question: Will the U.S. consumer prove resilient and save the day? The evidence says that, once again, the U.S. consumer will likely bend but not break.
U.S. consumers held up overall GDP growth in 2015–16 during the global commodity bust and in 2022–23 when Federal Reserve (Fed) interest rate hikes to curb inflation hurt both stock and bond markets.
Here, we assess the health of the consumer holistically, in three parts: the consumer balance sheet, the income statement and, finally, the labor market.
Judging by the news cycle—which features seemingly endless concerns over consumer debt, from student loans to credit card balances, to payday loans—you may be surprised to learn that the U.S. consumer balance sheet remains the healthiest of our three assessments.
In aggregate, consumer leverage remains low. As a percentage of assets, debt has decreased significantly from pre-global financial crisis (GFC) levels and is lower today than during the 1990s, one of the most prosperous decades in American economic history (Exhibit 1).
One might counter by saying that low delinquencies for household residential mortgages are holding down delinquencies overall, which is true. Residential mortgage delinquencies are down because home prices and housing equity have risen substantially in recent years in the context of America’s housing shortage.2
Yet FDIC data on household delinquencies excluding residential mortgages3 isn’t alarming, either: It rose through 3Q 2024, to 1.25%, slightly above pre-pandemic levels, and then it has declined (Exhibit 3)—and the reason isn’t hard to explain.
The best explanation: Loan providers temporarily relaxed their lending standards in 2021 and 2022, seeding the market with less creditworthy borrowers.4 Macroeconomic fundamentals, such as job and income growth, did not deteriorate, and so did not thereby contribute to the rise in delinquencies.
Since then, lending standards have normalized, and the rise in delinquencies is proving to be a one-off. We wouldn’t be surprised if the noncurrent individual loan rate kept falling in the quarters ahead, provided jobs growth continues and the U.S. economy avoids recession.5
If there is a consumer debt problem, it is concentrated in auto loans. Indeed, the auto loan situation is getting alarming. The noncurrent rate has soared in recent years to well above the pre-pandemic level (Exhibit 4).
What explains the problems in the subprime auto loan market? Idiosyncratic supply chain issues dating to the pandemic first sent auto prices soaring. That, combined with too-relaxed lending standards (particularly among alternative lenders specializing in underserved markets) and higher interest rates, are likely the main causes of the rise in delinquencies. Again, idiosyncratic and not a reflection of consumer health at large.7
Furthermore, the relatively small size of auto loan debt is important. Car loans make up only 9% of total U.S. consumer debt,8 while mortgages comprise over 70%. Auto loans are likely to see higher default rates, but should anyone think to liken the situation to the contagion that spread from mortgage-backed securities (MBS) to the broader financial system and became the GFC, the analogy really isn’t there. The auto ABS market totals only about $300 billion. Agency MBS totals more than $9 trillion.9
Another risky consumer debt trend is the fast rise in buy now, pay later (BNPL) loans, typically interest-free installment plans whose users tend to be financially vulnerable.10 Yet this segment is paltry in size, and in our view doesn’t change the broad picture of the consumer balance sheet. May 2025 BNPL spend was $6.8 billion, a fraction of the $715.4 billion in total retail sales in May.11
In summary, the U.S. consumer balance sheet overall remains quite healthy. One can find some issues (subprime auto loans, BNPL) under a microscope. But the broad picture is one of low leverage and low delinquencies across most of the U.S. consumer debt stack.
This healthy consumer balance sheet is a key reason we maintain a generally positive view of consumer-oriented credit market opportunities, particularly securitized credit.
How is high inequality affecting the consumer outlook?
It is well known that the United States has become significantly less equal in earnings and wealth over the last 30-odd years.12 Recent analyses (for example, from Moody’s) have suggested that consumer spending in America is increasingly driven by top-income earners, and that this presents a risk to the national economic outlook if wealth gains by top earners turned down.13 The Boston Fed, based on credit card data, also found spending since the pandemic more driven by higher-income consumers.14
This narrative is debatable.
Official government data shows no rise in spending share by the top 10% since the pandemic.15 As of 2023, it was slightly lower than nearly 10 years ago (Exhibit 6).
For the purposes of our analysis, and from a broad macro and markets perspective, the aggregate consumer spending impulse is a more important driver than any socioeconomic cohort.16Our sense is that many financial analysts tend to overinterpret an inequality-centric analysis of the U.S. consumer. Inequality analyses may matter for the performance of a company catering to low-income cohorts, for example. But these analyses should be discounted if the end goal is more macro, relating to business cycle analysis and predicting Fed policy.
However, could potentially illusory wealth gains—through what might turn out to be speculative investing—pose a macro risk if they were driving consumer spending? In principle, yes. If artificial intelligence (AI)–fueled stock market gains were becoming a primary driver of U.S. consumer spending, and if AI failed to meet earnings expectations and prompted a sharp stock market decline, it could spark a broader consumer spending downturn. A deflating of the wealth-effect dynamic occurred after the dot-com bubble burst in 2000. But we don’t think the dot-com bubble analogy holds up today, and we don’t think the rising stock market has been a primary driver of consumer spending lately.
The evidence: Consumer spending per capita roughly doubled between 1995–96 and 1998–99. But we see no comparable growth in recent years during the AI stock run-up (Exhibit 7). This suggests the wealth effect from stocks has not been rising.17
Tariffs are currently stressing the U.S. consumer’s income statement.
First, we need to dispel the myth that tariffs aren’t causing inflation to rise. The CPI data makes it evident that tariffs are taxing the U.S. consumer. Exhibit 8 shows that core goods prices (excluding food and energy) clearly inflected higher in 2025. No macroeconomic development other than tariffs would have caused the 2023–24 downward trend to reverse this year.
Exhibit 8 also illustrates a 2.7% deviation in prices currently, relative to the pre-inflection trend. That 2.7% is the tax on U.S. consumers from tariffs, amounting to roughly $120 billion (annualized, as of July’s data). (Pre-tariffs, the U.S. consumer was spending about $4.4 trillion on an annual basis on core goods.)
How much of the increased tariff revenue accruing to the federal government this year are consumers paying? The $120 billion tax on consumers implies that consumers are paying about 47% of the cost of tariffs so far in 202518
This 47% is being held down by an import and inventory surge that took place from December to March, ahead of the tariffs, and which delayed the pass-through of tariffs to the consumer. The tax on consumers should intensify further before it levels off: By year-end 2025, after those excess inventories are gone, we think the U.S. consumer will be bearing about two-thirds of the tariff costs.
How will we track this intensifying tax on consumers? The key metric here is real (or inflation-adjusted) wage growth—a primary driver of consumer spending in recent years.
Real wage growth has already weakened; it peaked at 2% in the third quarter of last year, and has fallen to 1.4% as of 2Q 2025. We expect further weakening: By the end of 2025 through early 2026, we think real wage growth could slip below 1% (Exhibit 9). However, we are not expecting a real wage growth recession, which occurred in 2022 (as the chart also shows) during the pandemic-driven inflation surge.
Americans won’t have one advantage they had in 2022: Pandemic fiscal stimulus combined with business closures created a large buildup of savings on household balance sheets—at its peak, worth about $2.1 trillion. That excess savings is an important reason the real wage growth recession of 2022 didn’t coincide with a broader macroeconomic recession. Those savings were finally depleted in late 2024.19
So the growth of real income, or wages, would be crucially important to maintain consumer spending if inflation were to surge.
In the end, we don’t think the tariff tax will be large enough to cause real wage growth to turn negative—assuming the labor market holds up and we continue to see a low impulse of layoffs.20 That’s what the labor market data has shown year-to-date. That is, however, an assumption.
We turn finally to the state of the U.S. labor market, addressing as well the question of how AI may be impacting labor demand.
The U.S. labor market has weakened but is not recessionary. Rather, its state continues to be “low hiring but also low firing.” The job-finding rate and the layoff rate have both moved directionally toward recession, but insufficiently to classify as a typical U.S. recession (Exhibit 10).
It doesn’t feel great, however, to the average job seeker. This helps explain the poor sentiment on the U.S. labor market21—and also why the capital markets continue to be well supported, characterized by high risk–asset valuations.
We are increasingly being asked whether AI is to blame for the weak hiring environment. On some level, this would make sense: If AI is affecting entry-level jobs more than senior jobs, we would expect less hiring rather than more layoffs, which fits the broad data. However, digging into the details, the data do not seem to fit this narrative, at least from a macro perspective.
The low hiring rate is affecting younger workers most, but younger workers with a college degree have actually fared better than younger workers overall in recent years—the opposite of what we would expect if AI were the driving force. AI is more likely to impact white collar jobs over blue collar jobs, as we’ve written previously.
From late 2023, when ChatGPT was first launched, to mid-2025, the unemployment rate for recent college grads rose less than it did for all young workers (Exhibit 11).22
To be sure, evidence is increasing about AI’s impact on the labor market for jobs within the technology sector, but that is not the same as saying AI is impacting the labor market as a whole. (Tech jobs make up about 2.4% of the total jobs in America.23)
One risk scenario in which AI might impact the labor market more comprehensively would be an economic recession. The trend of new technologies displacing workers has historically intensified during periods of recession, or weak aggregate demand, when companies have tended to accelerate plans to automate and cut jobs to curtail expenses.24
Again, we are not predicting an economic recession, but AI’s impact on the labor market could accelerate if aggregate demand were to weaken sharply.
The bottom line: The current low hiring rate doesn’t appear to be primarily driven by new technologies—rather, we think it is driven by broad macroeconomic uncertainty related to tariffs and monetary policy.
Economists will focus intensely on layoffs in the second half of 2025 and early 2026. Will the impulse of aggregate layoffs continue to stay quite low from a historical perspective, as we expect? In what is already an economic slowdown, as reflected in the H1 GDP and jobs growth data, what trigger could cause layoffs to surge? No one really knows precisely. But it will be related to sentiment and forward-looking expectations, which are now improving.
Since the shock of “Liberation Day,” business sentiment has improved and aggregate financial conditions have eased, both suggesting better growth in 2026, once the tariff tax on consumers stops rising. In addition, recent weak jobs growth data will likely accelerate the timeline for renewed Fed rate cuts, which has already further cushioned financial conditions. And the One Big Beautiful Bill tax legislation now provides some certainty to businesses that tax rates aren’t likely to change until (at the earliest) after the 2028 presidential election.
We think these dynamics will likely ward off the left tail that would be accelerating layoffs and economic recession. That said, real wage growth is likely to continue to weaken, and the layoff data will be heavily scrutinized in the coming months and quarters.
In sum, the U.S. economic outlook remains closely tied to the consumer’s resilience. Despite tariffs and a weakened labor market, our analysis leads us to expect that history to continue.
Our expectation that the U.S consumer can weather the current difficulties leads to our favorable view on consumer-related, asset-backed credit securities, which tend to offer a sizable yield pickup relative to similar duration Treasuries and investment grade corporate credits.
In equities, we like companies positioned to take advantage of consumer strength through leisure spending, particularly those that cater to high-end consumers (such as luxury cruise line companies). The leisure industry (a broad category including travel, hotels and online casinos) has favorable secular growth characteristics, low to no exposure to tariff policies, the potential to benefit from a cyclical recovery in 2026 and attractive valuations relative to growth potential.
We wouldn’t be surprised by market volatility in the coming months. Still, the data as we read it makes the case clear: Our outlook is for the U.S. consumer to bend but not break.
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