A look under the hood: US consumer holding up amid volatility

Consumer credit health: A key performance driver of securitized credit

In our 2025 outlook we emphasized the strong link between the health of the US consumer and the performance of securitized credit markets, especially asset-backed securities (ABS). In a bit of fortuitous programming, our Consumer Finance Symposium earlier this year brought together a broad mix of consumer lenders who were more than eager to dive into both the opportunities and risks ahead and how investors should think about their allocations.

Two key themes to watch as it relates to US consumer health include the increasing bifurcation in credit strength among consumer cohorts and how this will ultimately manifest itself, and the role the labor market will have on neutralizing the impact of inflation. In both cases, acute analysis is critical. Relying on just headline data (e.g., aggregate delinquencies, headline CPI, and unemployment) can mask the actual implications for consumer credit health and securitized credit performance and not tell the full story.

Bifurcation implications

The gap between the performance of higher-income consumers and lower-income cohorts is widening. Lower-come households are experiencing duress due to affordability challenges, which in turn are leading to higher delinquency rates and more reliance on credit. Other cohorts remain relatively healthy. As the chart below shows, credit card utilization and payoff rates — both of which tend to be effective performance measures — are healthy. Utilization, while higher than in recent years, has normalized. Credit card monthly payment rates remain elevated relative to history. 

Figure 1

Managing cohort outliers

This bifurcation and its effects are important considerations for those lenders and investors most exposed to lower-income consumers and are also important to the overall health of the economy due to the notable, ongoing shift in consumption patterns. The top 40% of consumers by income account for more than 70% of total consumption — an all-time high. In our view, this is the cohort we should be focusing on to chart trends and develop big-picture ideas. Put simply, this cohort drives the health of the economy.

As for addressing this anomaly, bifurcations create pockets of both risk and reward and place a premium on precision over broad diversification. Some actions to take to stay on your front foot include:

• Proactively managing default risk – as weaker cohorts default disproportionately, overall portfolio performance becomes more tethered to segment exposure. Provisioning for losses in these distressed segments is important. 
• Being more selective – bifurcations can exist in other cohorts as well, and investors may consider leaning more toward higher-quality consumer exposures or by underwriting subprime areas more tightly.
• Conducting cohort-sensitive analysis – investors should consider relying on more precise analysis — for example, by carefully segmenting exposures, stress-testing vintage performance, and selecting investment instruments (higher-quality tranches, robust credit protections) that may offer more protection.

Could improving labor markets help alleviate inflation pain?

The second dynamic revolves around the symbiotic relationship between labor market conditions and inflation. Inflation has been driving credit performance for some time, and we still see the potential for price increases on the horizon that will cause discomfort for many. That said, the key gauges of consumer health are steadily moving back to focusing on employment, on-time bill paying, and consumption. 

While the payrolls report in July showed weaker-than-expected job growth, the unemployment rate remains at a relatively healthy 4.2%, and wages, as measured by average hourly earnings, are still growing, both supported by still-low labor supply. Steady employment in this market is a powerful stabilizer that helps credit consumers, particularly the most vulnerable ones, navigate inflation. A strong labor market provides consistent income streams, which in turn support debt servicing. Job stability also mitigates credit risk by lowering the lielihood of default on consumer products like credit cards, personal loans, and auto loans. For subprime and near-prime consumers, employment income is often their sole financial cushion — thus, robust job openings, wage growth, and low unemployment rates can provide a valuable buffer. Inflation reduces real wages, but a steady paycheck still allows for repayment. As a result, credit investors should keep in mind that any headline deterioration caused by inflation may be less acute than history suggests — that is, provided the job market holds beyond the weak July reading.

The nature and sequencing of fiscal policy will matter and will determine the actual impact experienced from tariffs and tax cuts. Investors should also be on the lookout for any signs of further labor market deterioration — particularly where that erosion comes from, i.e., in lower-income or higher-income jobs. If it is the former, the bifurcation challenge becomes that much more acute but if it is the latter, it will have bigger implications for macroeconomic vulnerability. 

Four more trends to track

Several other top-of-mind trends to watch as we move through the second half of 2025:

1. New loan applications are slowing as consumers pull back on credit. Macro conditions and headlines may be driving this. But there has been more interest in home improvement loans. Aging housing stock creates more demand for these loans, which are well supported considering current home equity levels. 
2. It’s time to repay student loan debt but this is not keeping lenders up at night. Most lenders report that about one-fifth of their borrowers have some type of federal or private loan. Student loans are accounted for in the underwriting process, and issuers, especially auto and mortgage lenders, are taking comfort in historically exhibited priority of payment (auto, home, student loan). This is intriguing because the priority of payment approach will not work if the government must resort to wage garnishment. 
3. Credit builder apps: Good or bad? Many market participants see credit builder products as being counterproductive in some ways. They are doing what they purport to do, creating access to credit and offering ways to better manage it. The problem for lenders, however, is that these tools do not fully capture a borrower’s ability to pay back their debts. Because of this, lenders often downgrade consumers that use these products, which could end up hurting consumers more than helping.
4. Consumer Financial Protection Bureau (CFPB) closure. Last, on a regulatory note, there was no cheering or positive sentiment regarding the elimination of the CFPB. Given the risk of being subjected to disparate regulation, most lenders and investors plan to maintain their compliance policies and practices. 

Closing thoughts

The health of the US consumer remains a cornerstone of securitized credit performance and will inform our security selection process within multisector credit portfolios. As we move through 2025, bifurcation across income cohorts and the evolving labor market will continue to shape credit dynamics. Investors must navigate this landscape with precision — recognizing that while lower-income consumers face acute affordability challenges, higher-income cohorts dominate consumption and drive macro trends. The resilience of the labor market offers a stabilizing force against inflationary pressures, reinforcing the importance of employment as a buffer for credit risk. Ultimately, cohort-sensitive analysis, selective exposure, and proactive risk management will be key to unlocking value and mitigating downside in a bifurcated consumer credit environment.