State of the U.S. Consumer – Q3 2025: Resilience amid uncertainty

As we near the end of 2025, the U.S. consumer stands at a crossroads: resilient in the face of persistent headwinds, yet increasingly cautious as uncertainty mounts across economic, political and geopolitical fronts.

The Macro picture: Steady growth, sticky inflation

Recent results from major U.S. banks, including JP Morgan and Goldman Sachs, depict an economy that remains fundamentally robust. Consumer banking revenues continue to rise on the back of steady loan growth and stable deposits. However, early signs of fatigue are emerging, particularly in mortgage and auto lending, and delinquencies have edged up, albeit modestly.

The U.S. economy posted a robust 3.8 percent annualised GDP growth last quarter, a notable rebound from the contraction earlier in the year. September inflation data came in cooler than expected on Friday with the Consumer Price Index rising 3 percent, slightly softer than the 3.1 percent forecasts. The market responded positively with the Dow Jones Industrial Average, the Nasdaq Composite and the S&P 500 climbing to record highs.

The Federal Reserve, led by Jerome Powell, had previously signaled that further rate cuts are likely before year-end, with markets already pricing in a 25-basis point reduction ahead of today's meeting.

Labour market showing potential cracks beneath the surface

Headline unemployment remains low, and the probability of becoming unemployed has not risen sharply. However, the labour market’s underbelly tells a more nuanced story.

The share of unemployed Americans out of work for six months or longer has climbed to 26 percent, the highest since early 2022. The absolute number of long-term unemployed has nearly doubled from 1 million in early 2023 to over 1.9 million today. New entrants to the labour force are also struggling: the share of unemployed who are new to the labour market peaked at 13.4 percent in July – the highest since 1988 – and remains elevated at 10.8 percent.

These trends may suggest a growing mismatch between available jobs and the skills of job seekers, exacerbated by rapid technological change.

One positive development this week for millions of workers enrolled in income-based, income-contingent or pay-as-you-earn student loan forgiveness plans was the announcement from the U.S. Department of Education that it will resume processing loan forgiveness under the IBR plan.

Meanwhile, approximately 7.7 million Americans on the SAVE Plan remain in forbearance, and delinquencies are rising rapidly with a projected 10 million student borrowers likely in default by the end of 2025, including more than 10 percent of borrowers who are "seriously delinquent" (loan balances are 90+ days past due), according to Fed data.

The AI Boom: Growth engine and disruptor

Spending and capital expenditure around artificial intelligence has emerged as a defining force in the U.S. economy in 2025. According to Morgan Stanley, nearly 40 percent of U.S. GDP growth this year is attributable to AI-related investment, with AI accounting for the lion’s share of S&P 500 earnings and capital expenditure growth.

We believe the impacts of AI will be transformative and enduring, but we are still so early in the journey that it is impossible to say for certain whether its ultimate impact will meet the significant capital expenditure figures and market expectations. While it is driving economic growth today, skeptics will caution of overinflated hype and question whether the technology is a flash in the pan that is ultimately unsustainable.

Of course, AI is not only driving productivity gains and operational efficiencies across traditional sectors, but it is also unlocking entirely new markets and business models, many of which are only just beginning to emerge. The paradox: AI-driven productivity gains are inherently anti-inflationary, reducing costs and enabling new efficiencies, but the transition is painful for those whose roles are being automated or fundamentally changed. By contrast, tariffs and immigration policy are inflationary.

Consumer sentiment: holding steady, but cautious

Despite these crosscurrents, U.S. consumers have thus far remained resilient. Credit and debit card spending is solid, and household balance sheets are largely intact. The most recent data from the New York Fed says household debt balances increased by 1 percent from the previous quarter, with credit card balances up 5.9 percent over a year ago.

However, there are signs of increased caution: savings rates have ticked up, and anecdotal data, ranging from rising sales of value-oriented products to declining cardboard box production, suggests a subtle shift towards thrift.

A less subtle shift is taking place with car repayments, where the number of subprime borrowers who are at least 60 days late on their loans has doubled since 2021 to 6.43 percent, according to a CNN report last week. The publication notes this is worse than the past three recessions. Despite that rise, preliminary data from the University of Michigan’s October survey of consumers suggests sentiment remains virtually unchanged month over month. For the year, sentiment is at its lowest point since 2022.

The report notes that “pocketbook issues like high prices and weakening job prospects remain at the forefront of consumers’ minds,” and goes on to say consumers “do not expect meaningful improvement in these factors.”

Geopolitics and policy: The wildcards

Geopolitical tensions remain elevated, with the ongoing tit-for-tat U.S.-China dispute meaning increased prices for imported goods are being passed along to American consumers. Further pricing pressure could continue if trade tensions escalate further, and supply chain disruption and port disruptions could lead to higher shipping rates and import fees as the number of cargo vessels moving goods are reduced. Tariffs and trade disruptions are beginning to impact producer prices, though the effects on consumers have been more muted thus far.

In Washington, the spectre of government shutdown may be contributing to a heightened sense of uncertainty, although the University of Michigan survey highlights that there is little evidence so far that the ongoing federal government shutdown has moved consumers’ views of the economy.

Outlook: Resilience tested

The U.S. consumer has weathered a remarkable series of shocks over the past several years—from the pandemic to inflation, from the Great Resignation to the AI revolution.

As we look ahead to 2026, the central question is whether this resilience can be sustained in the face of persistent uncertainty and structural change. For now, the story is one of “steady as she goes,” but with more caution in the air, and the potential for turbulence ahead. My advice? In omnia paratus – be prepared for all things.