Consumer spending accounts for nearly 70 percent of GDP, and there are growing signs that consumers are becoming increasingly stretched. The first reading of Q2 2025 GDP showed a noticeable slowdown in personal consumption expenditures growth during the first half of the year compared to 2024. That spells trouble for the second half of 2025.

The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit showed that consumer credit card balances reached $1.2 trillion in Q1 2025, a 6-percent increase from the prior year. Relative to GDP, credit card debt has been largely flat since the second half of 2023, but there has been a marked uptick in delinquencies, suggesting that consumers are having more difficulty paying their bills. The share of credit card balances 90 days or more delinquent reached 12.3 percent, the highest since Q1 2011. It isn’t just credit card debt. Total debt balance 90 days or more delinquent jumped from 2 percent in Q4 2024 to 2.8 percent in Q1 2025.

Consumers short on cash are not solely relying on credit cards to bridge the gap. A survey from LendingTree found that almost half of survey respondents now use “buy now, pay later” (BNPL) services.  Concerningly, they are not using BNPL to pay for big-ticket items. The survey found that 25 percent used BNPL to buy groceries, up from 14 percent a year ago. Moreover, 41 percent of users paid late, a 7-percentage-point jump from a year ago. The 2024 Federal Reserve’s Report on the Economic Well-Being of U.S. Households had similar findings. The use of BNPL increased slightly from 14 percent to 15 percent. The survey, however, found that the share of those who paid late jumped from 18 percent to 24 percent. More troubling was that 58 percent of users said the reason for using BNPL was because it was the only way they could afford what they were buying. The uptake of BNPL, according to the Fed, varied by income. Eleven percent of families with incomes exceeding $100,000 used BPNL, while the most likely to use the service – those earning between $25,000–$49,999 – had an uptake of 19 percent. It was those, however, earning less than $25,000 who had the highest rate of late payments at 40 percent.

But late payments are not unique to those at the lower end of the income range. Data from VantageScore showed that 0.34 percent of consumers earning $150,000 or more were 30–59 days past due on loans, up from 0.27 percent in June 2023. The rate of those 60–120 days past due jumped from 0.12 percent to 0.22 percent. Even those at the high end are having increased difficulty paying bills.

The marked slowdown in job growth during the first half of 2025 increases the probability of a slowdown in consumer spending. Monthly payroll gains averaged 130,000 over the first six months of 2025, down from the 164,000 monthly pace during the same period in 2024. The source of the weakening labor market, thus far, has largely come from a hesitancy among firms to hire rather than a desire to lay off workers, though firms may soon be forced to reduce headcount to protect margins as tariffs take effect if they are unable to pass along the full cost to consumers.

Freddy’s Forecast: July Jobs

The June jobs report showed employers added 147,000 new hires to their payrolls while the unemployment rate ticked down to 4.1 percent. Average hourly earnings rose by 8 cents, or 0.2 percent for an annual gain of 3.7 percent.

The strong headline number masked some underlying weakness in the data. Hiring among private industry and government was evenly split. Private-sector job gains were almost exclusively concentrated in the health care and social assistance sector. Meanwhile, manufacturers shed 7,000 jobs and the wholesale trade industry cut 6,600 positions.

July data from payroll processor ADP showed private-sector employers increased headcount by 104,000 during the month, a reversal from the revised 23,000 job cuts in June. Hiring was led by job gains in the leisure and hospitality sector (+46,000) and financial activities (+28,000). Goods-producing industries also contributed to job gains, adding 31,000 jobs led by 15,000 workers in the construction sector.

After trending higher for much of the first half of the year and reaching a near-term peak of 250,000 on June 7, initial jobless claims fell for six consecutive weeks through the week ending July 19, before increasing by 1,000 for the week ending July 26 to 218,000. Continuing claims remained above the 1.9 million level, suggesting that firms are neither hiring nor firing.

The JOLTS report confirmed that businesses remained reluctant to hire or fire. Job openings dipped by 275,000 to 7.4 million in June, while hires slipped by 261,000, the largest drop since June 2024. Meanwhile, the rate of layoffs remained historically low.

In his press conference following the Federal Open Market Committee policy rate announcement, Federal Reserve Chair Jerome Powell noted that there is increased importance placed on using the unemployment rate to measure labor market slack. He explained that as the supply and demand for labor both decrease, the breakeven level of job growth – which is the level of job growth required to keep pace with labor force growth – has declined. In other words, slower job growth may not necessarily reflect a weakening labor market.

For the July report, expect topline payroll growth of 105,000. The unemployment rate is likely to tick up to 4.2 percent while growth in average hourly earnings increases to 0.3 percent, or 11 cents, for an annual gain of 3.8 percent.