Bottom line up front: The economic data this week tells a story of resilient consumers facing mounting headwinds. Inflation pressures remain somewhat contained – perhaps due to emerging cracks in consumer finances.
What’s Behind the Latest PCE Numbers
The PCE price index rose 0.14% for the month, putting inflation at a 1.7% annualized rate, with core PCE posting respective readings of 0.18% and 2.2%.
Energy prices fell 4.6% year-over-year but even without the decline, inflation is still running just slightly above the Fed’s 2% target.
The income and spending dynamics reveal an important story. Personal income declined 0.4% in May while spending fell 0.1%. Recent months saw elevated income growth thanks to policy changes – Social Security Fairness Act retroactive payments and Emergency Commodity Assistance Program payouts to farmers provided temporary support. But that support will soon wane. At the same time, private sector wage growth continues to slow.
The Student Debt Crisis Hits Hard
Another significant development for consumer spending power is the return of student loan delinquencies. After a 43-month payment pause, nearly one in four student loan borrowers (23.7%) were behind on their student loans in the first quarter of 2025.
The scale of this change is unprecedented. According to the Quarterly Report on Household Debt and Credit published by the New York Fed, more than 2.2 million newly delinquent borrowers have seen their credit plunge by over 100 points, while more than 1 million have experienced drops of at least 150 points.
This isn’t just about student loans – it’s about access to consumer credit going forward. An estimated 2.4 million delinquent borrowers previously had credit scores above 620, meaning they qualified for mortgages, auto loans and credit cards before these delinquencies hit their reports. Many no longer do.
The timing couldn’t be worse. These borrowers are predominantly millennials and Gen Z near or at peak home-buying age, facing an already brutal housing affordability crisis. When credit access tightens for millions of consumers simultaneously, spending patterns shift – and not in ways that support robust economic growth.
Labor Market Signals Point to Weakness Ahead
The frozen labor market adds another layer of concern for consumer spending. Private sector wage growth continues slowing as unemployment duration rises and job seekers give up. This creates a feedback loop: weaker labor market conditions reduce workers’ bargaining power, which slows wage growth and ultimately constrains spending.
Housing’s Negative Wealth Effect
The expected decline in home values represents another headwind for consumer spending going forward. For homeowners who’ve relied on housing wealth gains to borrow and spend, a negative wealth effect could cause them to curtail spending.
What’s Next?
Next week brings construction spending and auto sales data – both expected to show weakness. But the main event is the jobs report, where employment growth is expected to slow further and the unemployment rate could nudge higher.
