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With the amplifying global trade struggle boosting the chance of a recession in the U.S., and Europe's economy set to slow significantly, consumers will likely tighten their purse strings. Recent data on consumer credit was already showing signs of deteriorating performance.

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).

What We're Watching

Even before the Trump administration's April 2 announcement of widespread tariffs on nearly every country in the world (many of which have since been paused for 90 days), U.S. consumers were growing pessimistic about income, business, and labor-market conditions. The Conference Board's March survey on consumer confidence showed that Americans' optimism had dropped to the lowest level in 12 years.

This comes as higher household debt has started to weigh on a growing number of consumers. Credit card balances increased to a record $1.38 trillion (non-seasonally adjusted) at the end of last year, and a May 2024 note from Liberty Street Economics showed accounts with 60% or higher utilization rates were transitioning to delinquency at rates that surpassed pre-pandemic levels.

The resumption of government student loan payments (as of October 2023, following years of forbearance) poses another obstacle for consumers.

We are also seeing more buy-now, pay-later (BNPL) arrangements, especially among younger consumers with low credit scores. The risk here is that, unlike with credit cards, BNPL obligations generally aren't reported on credit bureau reports, thus giving lenders an unclear picture of these consumers' overall debt levels.

But perhaps the most notable signs of distress are in the performance of auto loan asset-backed securities (ABS). At the end of 2024, losses and delinquencies of 60 days or more among prime loans had reached their highest monthly averages since 2010.

Meanwhile, auto subprime delinquencies also reached an all-time high, and average monthly losses climbed to near the high last seen in 2009. It's worth noting that a surge in auto loan originations in 2021 and incremental growth the following year brought the figure to the highest in history as lenders relaxed their standards, thus contributing to weakening loan performance.

In Europe, the picture remains rosier for now—but there are some pockets of weakness among consumer-related securitizations, including residential mortgage-backed securities (RMBS). In U.K. transactions, for example, arrears have remained broadly flat for prime borrowers but have typically increased substantially since 2022 in the buy-to-let (BTL) subsector.

What We Think And Why

We think Americans will soon pull back on purchases, dealing a blow to the world's biggest economy, which is largely fueled by consumer spending. We now forecast GDP will expand just 1.9% this year. We also expect consumer spending growth of just 2.6% this year and 2.1% next year. (Note that these forecasts don't account for the April 2 tariffs and don't fully capture the recent escalation in tensions between the U.S. and China, with the U.S. levying 145% duties on Chinese goods and China's tariffs on the U.S. totaling 84% to go along with other trade restrictions.)

Meanwhile, we've seen signs that consumer distress is spreading to higher-income households and borrowers with higher credit scores. In the case of auto loan performance, the lower-income quartile and subprime (credit scores below 620) cohorts are clearly exhibiting increases in 30-plus day delinquencies, according to Liberty Street Economics data.

But delinquencies are also rising in the near-prime and second- and third-income quartiles, and borrowers with higher incomes and credit scores are showing signs of weakening performance. What's especially unusual about this trend is that the U.S. labor market has been surprisingly resilient, with historically low unemployment.

Under our current economic base case, the ratings performance for U.S. structured finance (excluding commercial mortgage-backed securities) would continue to remain relatively stable, with affected sectors having limited negative rating movements.

However, some corporate ratings have already been affected, particularly in the consumer goods space for companies whose profitability and cash flows will weaken in part because of tariffs, as well as lower consumer discretionary spending.

Among rated consumer goods and retail companies in Europe, the Middle East, and Africa (EMEA), alcoholic beverage and personal luxury goods companies are at most risk from U.S. tariffs. Most other EMEA-based rated consumer goods and retail companies operating in the U.S. will see less of a direct effect thanks to their global manufacturing footprints and generally diversified revenue streams and sourcing capabilities.

However, the secondary effects of higher tariffs (e.g., slower economic growth, higher inflation, and weaker consumer confidence) could affect a wider section of EMEA consumer goods and retail companies we rate.

Retail prices for goods and services in the U.S. are on average at least 20% higher than in 2018, and we believe the largest near-term risk to the consumer products and retail sectors is the added pressure on already-stretched household budgets.

As consumers spend their savings and use more credit card debt (while the wealth gap widens) demand remains weak in discretionary categories, and retailers and manufacturers have less pricing power than they once did. Concerns about tariffs and inflation have weighed on consumer sentiment, which declined 12% in March, suggesting weaker future consumer spending.

Retailers and consumer products makers with the most tariff exposure are those with higher proportions of private label offerings or that directly source from suppliers and sell more hard goods, apparel, footwear, and discretionary products. Small, narrowly focused retailers will suffer more. They will have less negotiating power with suppliers and less pricing power with consumers.

Both the U.S. consumer products and retail sectors have negative rating biases, at 19% and 23%, respectively. Downgrades exceeded upgrades in the first three months of the year, and we believe negative rating actions could continue amid a weaker consumer environment.

What Could Change

An unforeseen jump in unemployment could lead to further distress for consumers who are already facing a myriad of financial challenges. A tariff-induced recession in the U.S. (the chance of which is rising, in our view), combined with massive job cuts as part of the Trump administration's Department of Government Efficiency cost-cutting initiative, could be the catalyst for such a scenario.

The prevailing uncertainty is likely to further undermine business and consumer confidence—heightening concerns about corporate investment, employment and consumer spending, and overall economic activity. And given the share of U.S. consumer spending on imported goods, tariffs could reignite inflation.

As delinquencies on auto ABS rise across credit and income groups, tariffs look set to boost the cost of autos, putting upward pressure on the already high cost of purchasing a new vehicle. We therefore expect that even minor increases in unemployment (consistent with our baseline forecast) could have an impact on auto ABS collateral performance.

Writers: Joe Maguire and Molly Mintz