Uncertainty and credit concerns slow consumer spending

Article originally posted on CoStar on May 21, 2025

American consumers are hunkering down, a slew of data releases showed last week.

Consumers spent March loading up on the big-ticket imported items most at risk of facing price spikes due to higher tariffs in the on-again, off-again trade war with China. For the rest of the first four months of the year, though, they were busy paying down credit card and car loan debt while shifting other spending toward necessities.

Retail sales growth slowed in April, rising 0.1%. That is more in line with its flat performance in February and its 0.9% decline in January. By contrast, sales in March grew by 1.7%, their highest monthly increase in over two years, driven largely by front-loaded purchases of automotive, electronics and home improvement goods.

Though some discretionary spending continued into April, with solid growth in restaurant spending, at 1.2%; home improvement, at 0.8%; and furniture, at 0.3%; consumers pulled back in most other categories, with sporting goods sales down 2.5% and miscellaneous retailers down 2.1%.

As consumers pulled back on spending, credit card balances fell by 2.4% from an all-time high of $1.21 trillion to $1.18 trillion in the first quarter. Car loan balances, representing the largest share of non-mortgage debt at $1.64 trillion, fell for the first time since the second quarter of 2020, according to the Federal Reserve Bank of New York’s quarterly household debt and credit survey.

Although credit card balances typically fall in the first quarter, as consumers pay off holiday debt, the 2.4% decline was the largest drop since the first quarter of 2021, when COVID-era stimulus led to significant payoffs.

Debt balances remain manageable for most households, but an increase in delinquency rates and the resumption of student loan delinquency reporting could hamper households’ willingness to continue spending, particularly as the hiring market softens. The share of balances in delinquency for 90 days or longer reached 12.3% in the first quarter, its highest share since early 2011 and up from a recent trough of 7.7% in the fourth quarter of 2022.

Student loans, which at $1.63 trillion account for nearly as much as automotive loans, exited a long-standing grace period for delinquency reporting. The share of balances in 90-day-or-longer delinquency reached 7.7% in the first quarter of 2025.

Student loan repayment officially resumed in October 2023, meaning on-time borrowers have likely adjusted their budgets to account for new payments. However, the Department of Education reports that about 5 million borrowers remain in default and eligible for involuntary collection, which resumed earlier this month. An additional 4 million borrowers who are more than 90 days delinquent are likely to take a hit to their credit ratings of between 75 and 177 points, according to a New York Fed analysis. Though a sizable share of these borrowers already had subprime credit scores below 620, about 2.4 million borrowers with higher scores may face sudden declines in eligibility for mortgages, auto loans or credit cards, another potential headwind for consumer spending in this cohort.

For most consumers, however, continued job growth rather than restricted credit availability should be the primary determinant of future spending. While the unemployment rate remains healthy at 4.2%, a handful of high-profile layoffs, such as Microsoft’s 6,000-job cut in early May, combined with a generally slower hiring environment, have heightened uncertainty around the future health of the job market.

That uncertainty has put an additional damper on consumer sentiment. Respondents to the New York Fed’s April Survey of Consumer Expectations rated their average likelihood of job loss at 15.3%, bringing its 12-month trailing average to 13.81%, up 60 basis points from a year prior and roughly on par with August 2021 levels. At the same time, respondents reported an average probability of leaving their job voluntarily at 18.2%, down from 19.4% in April 2024 and a pre-pandemic average of 21.4% from 2016 to 2019.

Consumers are not the only ones experiencing heightened uncertainty. Business sentiment has also been sliding recently, with the National Federation of Independent Business’ Small Business Optimism Index falling for its fourth consecutive month in April. Both sales expectations and capital investment plans weakened, which could presage a blow to the economy.

Meanwhile, consumer sentiment fell for its fifth consecutive month in May to its second-lowest reading on record, according to a University of Michigan survey. Consumer expectations for inflation next year surged, largely on the uncertainty generated by trade policy and expectations for higher tariffs pushing prices higher. The survey concluded after the United States and China announced a 90-day pause on most tariffs, suggesting that consumers will need to see more substantive progress on trade agreements for their uncertainty and fears of continued elevated inflation to be alleviated.

So far, inflation data has not yet reflected the impact of tariffs, as most were not yet imposed by the time of data collection. The consumer price index reading for April showed an annual inflation rate of 2.3%, less than analysts expected and a four-year low. However, inflation readings for May and beyond are likely to accelerate as the administration maintains its 10% across-the-board import tariffs, and 30% tariff on Chinese imports, while negotiating with trading partners.