Slowing Consumer Credit Growth: A Looming Storm for Financial Markets?

The U.S. consumer credit market has long been a barometer of economic health, but recent data suggests a troubling inflection point. According to the Federal Reserve's G.19 release, consumer credit grew at a seasonally adjusted annual rate of 3.8% in July 2025, with revolving credit surging 9.7% and nonrevolving credit rising 1.8%. On the surface, these figures suggest resilience. But beneath the numbers lies a story of fragility: high interest rates, policy uncertainty, and a softening labor market are creating headwinds that could ripple through financial institutions and the broader economy.

The Paradox of Resilience and Risk

Consumer credit growth has defied expectations in 2025, driven largely by borrowing in high-interest revolving credit (e.g., credit cards). However, this resilience is not uniform. Nonrevolving credit-encompassing auto loans, student debt, and mortgages-has stagnated, growing at a mere 1.8% annual rate according to the G.19 release. This divergence reflects shifting consumer behavior: households are increasingly relying on short-term, high-cost credit to service existing debt rather than investing in long-term purchases.

State Street's Q3 2025 Outlook warns that this trend is unsustainable. High borrowing costs, exacerbated by the Federal Reserve's 5.25% federal funds rate, are squeezing households, particularly those with subprime credit profiles. Delinquency rates for mortgages and auto loans have already risen year-over-year as of July 2025, the Outlook notes, while the ABA's Credit Conditions Index (37.5 in Q3 2025) signals deteriorating expectations for credit quality over the next six months.

Financial Institutions: Between Caution and Exposure

Banks and lenders are caught in a delicate balancing act. On one hand, they've tightened underwriting standards for higher-risk segments, such as non-investment-grade corporate bonds and commercial real estate, a trend highlighted in State Street's Outlook. On the other, they remain exposed to a growing cohort of consumers reliant on revolving credit. TransUnion's 2025 forecast projects a 4.4% increase in total credit card balances for the year-a sharp slowdown from the double-digit growth of 2022 and 2023-but also predicts a 12-basis-point rise in serious delinquency rates to 2.76%.

The risks are not confined to consumer portfolios. Commercial real estate and corporate credit markets, already strained by elevated rates, face compounding pressures if consumer demand weakens further. As State Street notes, a "growth pause" scenario-defined by GDP growth of 1% and tepid job gains-could force financial institutions to reassess their risk appetites.

Macroeconomic Implications: A Fragile Equilibrium

The broader economy is equally vulnerable. Consumer spending accounts for roughly 70% of U.S. GDP, and a slowdown in credit-driven consumption could amplify downward pressure on growth. The Federal Reserve's rate cuts in Q4 2025 may provide temporary relief, but they risk reigniting inflation if implemented too aggressively. Meanwhile, geopolitical tensions and a potential U.S.-China trade war loom as tail risks, a point also raised in State Street's Outlook.

Equifax's September 2025 analysis underscores the uneven landscape: while credit card utilization has dipped slightly, mortgage and auto delinquencies are climbing. This bifurcation suggests that households are prioritizing essential expenses over discretionary spending, a trend that could stifle economic momentum.

Conclusion: Navigating the Crosscurrents

The U.S. consumer credit market is at a crossroads. While current growth rates mask underlying fragility, the risks to financial institutions and the broader economy are real and mounting. Investors must weigh the short-term stability of credit markets against the long-term implications of tightening conditions, regulatory uncertainty, and a potential "growth pause." For now, the Fed's policy pivot and cautious lending practices may mitigate the worst outcomes-but the road ahead remains fraught.