Consumers slow spending as delinquency rates rise

Article originally posted on CoStar on August 13, 2025

American consumers have become more hesitant to spend, with year-over-year growth in real personal consumption expenditures falling a full percentage point from 3.1% at the end of last year to 2.1% at the end of June.

While general uncertainty about the path of economic policy may be a factor in their restraint, rising consumer loan debt delinquencies may be contributing to the slowdown.

The share of household debt balances in delinquency reached 4.4% in the second quarter of 2025, the highest level since early 2020, according to the Federal Reserve Bank of New York’s quarterly consumer credit panel report.

That represents a 1.2-percentage-point increase in the delinquency rate compared to the second quarter of 2024. The increase is largely due to the resumption of reporting on student loan delinquencies at the beginning of the year.

Even with the increase, overall delinquency levels remain on par with historical averages. Delinquencies during the five-year period from 2015 to 2019, for example, averaged 4.9% after reaching a peak of 11.9% at the height of the foreclosure crisis in the fourth quarter of 2009.

Still, the sharp rise in longer-term delinquencies reflects a subset of struggling consumers, and comes at a time when overall spending has been flattening in the face of job-market uncertainty. Though the share of balances 30 to 120 days late fell from 2% to 1.6% in the second quarter, the share of balances 120 days or more late rose from 2.3% to 2.8%.

The proximate cause of the increase in delinquencies is the resumption of reporting on student loan delinquencies. After four years of forbearance and a grace period for reporting delinquencies, the share of student loan balances more than 90 days delinquent increased from less than 1% at the end of 2024 to more than 10% in the second quarter of 2025. Additional student loan delinquencies will likely appear in the third-quarter report, as an increasing share of balances transitioned into early delinquency during the quarter.

The 10.2% student-loan delinquency rate represents a return to pre-pandemic conditions. On average, more than 11% of student-loan balances were more than 90 days delinquent between 2015 and 2019. At $1.64 trillion, student loan balances make up the second-largest non-mortgage category of debt behind automotive loans, which are $1.66 trillion. Roughly 5% of automotive loans were 90 days or more delinquent.

Although credit card delinquencies ticked down slightly in the second quarter, delinquency rates in this category have been on an upward trend since the onset of inflation in mid-2022. Credit card balances have outpaced other debt balances, growing more than 36% in the three years since the second quarter of 2022. That is more than double the pace of total debt, which has grown at roughly 14% during the same period.

Total credit card debt of $1.2 trillion has plateaued since the fourth quarter of 2024, but delinquency rates have continued to rise from 11.4% to 12.3% during the same period. That is the highest rate since mid-2011. By comparison, credit card delinquency rates averaged 7.8% between 2015 and 2019.

Though the rise in credit card delinquencies is concerning, overall household balance sheets remain in relatively good shape. Household debt service payments averaged 11.2% of household income, up from less than 10% in 2021 but still below the pre-pandemic average of 11.6% from 2015 to 2019 or the Great Recession-era peak of nearly 16%. That is largely because mortgage debt, which is by far the largest share of household debt, remains largely current. Only 0.8% of the $12.9 trillion of mortgage balances are over 90 days late. That is nearly half the 1.6% delinquency rate from 2015 to 2019, and nowhere near the almost 9% delinquency reached in 2010.

Still, rising credit card balances and returning student loan payments combined with a slowing job market and potentially reaccelerating inflation have led consumers to pull back. Real consumer spending has been effectively flat since January, aside from a burst of pre-tariff goods stockpiling in March.

The second half of 2025 could reveal if high-income consumers can continue to carry the economy and whether the debt challenges seen in the data are as confined as analysts assume.

With recent data showing job growth slowing and consumer spending on a downward trend, the Federal Reserve is monitoring the labor market side of its dual mandate. But news this week on inflation, the other side of its mandate, presents the agency with a difficult choice about which presents the greater risk. New data showed the core consumer price index heating up to 3.1% annually in July; the Fed seeks to hold it to 2%.

The Fed’s quandary? Markets expect the surprisingly large revisions to the jobs data for May and June — showing new weakness — to push the Fed to offer some relief in the form of lower interest rates, but that action could run counter to the need to hold inflation in check should the new broadly imposed tariffs seep into prices.

The next jobs report, coming before the next meeting of the Fed’s policymaking committee, could well be the deciding factor.