The Resilience of U.S. Consumer Spending Amid a Softening Labor Market

The U.S. retail sector is navigating a paradox: modest growth in discretionary spending coexists with a fragile labor market, surging consumer debt, and a demographic shift in workforce participation. As investors assess the durability of retail sales in 2025, the interplay of these factors reveals a landscape where resilience is unevenly distributed across sectors and demographics.

Retail Sales: A Modest but Uneven Recovery

Q2 2025 data shows U.S. retail sales grew 3.66% year-over-year, a figure below the long-term average of 4.54% but still outperforming the 2.81% growth of July 2024. This growth, however, masks volatility. For instance, April 2025 saw a 4.67% YoY increase, while May's growth plummeted to 2.94%. The decline in June and July suggests that while consumers are still spending, their behavior is increasingly cautious.

The over the past year reveals a divergence. While big-box retailers have maintained steady performance, specialty retailers—particularly in discretionary categories like apparel and home goods—have seen sharper declines. This aligns with broader trends: consumers are trading down to essentials and private-label products, a strategy that has propped up food retail but left non-food sectors vulnerable.

The Debt Burden: A Double-Edged Sword

Total U.S. household debt hit $18.39 trillion in Q2 2025, a 1% quarterly increase driven by rising credit card balances ($1.21 trillion), student loans ($1.64 trillion), and mortgages ($12.94 trillion). While this debt fuels short-term consumption, it also creates long-term fragility. For example, 10.2% of student loan debt was 90+ days delinquent in Q2 2025, a sharp rise from 0.80% in Q2 2024. Similarly, credit card delinquency rates remain elevated at 6.93%, with subprime borrowers (those with credit scores ≤600) carrying a disproportionate share of risk.

The underscores a critical tension. As interest rates remain near 5%, servicing costs for high-debt households are rising, squeezing disposable income. This dynamic is particularly acute for middle-aged Americans (40–49), who carry the highest debt ($4.81 trillion) and are more likely to hold mortgages and student loans. For younger demographics (18–29), debt levels are lower but growing, with credit card balances rising 27% quarter-over-quarter.

Labor Market: Stability with Undercurrents of Weakness

The U.S. unemployment rate averaged 4.2% in Q2 2025, a slight uptick from 4.1% in Q1 but still historically low. Job creation accelerated, with 150,000 average monthly payroll additions, but labor force participation (LFP) dipped to 62.3%, the lowest since November 2022. This decline reflects broader demographic shifts, including aging populations and policy-driven exits from the workforce.

Wage growth, at 3.9% YoY, has provided a buffer for consumers, but hiring caution—particularly in the private sector—suggests employers are hedging against economic uncertainty. The (1.05 in Q2 2025) indicates a balanced labor market, but hiring rates have remained below 4.0% since November 2023, a sign of tepid demand.

Investment Implications: Where Resilience Meets Risk

The durability of retail sales hinges on sector-specific strategies. Food retail, bolstered by private-label products and cost-conscious consumers, has maintained EBITDA margins of 6–7%, outperforming non-food retailers, which see margins at 7–8%. Investors should prioritize companies with strong supply chain flexibility and pricing power, such as those leveraging private-label brands to mitigate supplier costs.

Conversely, non-food retailers—especially those in discretionary categories—face structural challenges. The highlight the fragility of over-leveraged firms. These companies may struggle to service debt as interest rates remain elevated, making them high-risk plays.

For a more defensive approach, consider sectors insulated from debt cycles, such as healthcare or utilities. However, for those willing to take on risk, the food retail sector offers a compelling case. Companies like Kroger (KR) and Albertsons (ACI) have demonstrated resilience by adapting to shifting consumer preferences and maintaining tight cost controls.

Conclusion: A Fragile Equilibrium

The U.S. consumer remains a force, but their spending power is increasingly contingent on debt and wage growth. While retail sales have held up, the underlying trends—rising delinquency rates, cautious hiring, and a shrinking labor force—suggest that this resilience is not guaranteed to last. Investors must balance optimism with caution, favoring sectors with pricing power and avoiding over-leveraged players in discretionary markets. In a high-debt, low-growth environment, durability will belong to those who adapt, not those who endure.