A lot is happening to the US economy. Much of this is going unnoticed. The economy, after years of resilience, is now showing signs of a deeper malaise that is neither temporary nor isolated.

Latest economic data paints a picture is a lot different and may indicate that it is not business as usual. Unemployment crept up to 4.4% (September 2025) up from 4.1% just a month earlier. The nominal job gains came largely from healthcare and food services - sectors that tend to absorb workers during downturns, not signal recoveries. Meanwhile, most other parts of the economy quietly slipped into contraction. For a labor market that has carried the weight of high inflation, high interest rates and stubbornly high prices for nearly three years, this softening isn’t surprising. It is consequential.

What is alarming is not just the slowing job market; it is the massive debt profile of the US consumer now. Reports indicate that mortgage balances rose $137 billion in the third quarter, totaling a record 13.07 trillion. credit-card balances - already at historic highs - climbed another $24 billion to $1.23 trillion. Auto-loan balances remain stuck at $1.66 trillion, refusing to budge despite worsening affordability. (Source : New York Fed) .

What should alert policymakers, however, is not just the cooling job market - it’s the debt profile of the American household at this exact moment. The Federal Reserve’s latest Quarterly Report on Household Debt and Credit shows a consumer that is borrowing into weakness. Mortgage balances jumped to $137 billion in the third quarter alone, reaching a record $13.07 trillion, with $512 billion in new mortgage originations despite the persistence of elevated rates.

Meanwhile credit-card balances - already at historic highs - climbed another $24 billion to $1.23 trillion. Auto-loan balances stood at a high of $1.66 trillion. A record 6.65 percent of subprime auto loans were at least 60 days past due in October, the largest share in data going back to 1993 (Fitch Ratings). That’s up from 3.76 percent four years earlier.

Meanwhile, the job market has been rocked by a wave of layoffs that is one of the worst in decades. According to Forbes, over 1 million jobs have already been cut in 2025. The breadth of these layoffs is particularly noteworthy: government, retail, transportation, and technology sectors are being impacted simultaneously. Major corporations – Amazon, UPS, Verizon, IBM, and others - have not only trimmed staff but have signalled that further cuts are possible.

Hidden behind the numbers is a deeper structural shift. Consumer spending has long been the engine for stability and sustainability of the US economy. But a large majority of consumers in the mid to low-income brackets are increasingly unable to sustain spending levels. This is due to the combined effects of high interest rates, rising prices, and stagnating real wages. The massive layoffs witnessed recently have only exacerbated the uncertainty and increased the probabilities of default manifold.

The combined pressures of high debt levels together with record layoffs, particularly in well-paying white colour jobs will tend to impact most visibly in consumer credit markets. The rise in delinquencies is no longer limited to subprime borrowers; middle-income households, once relatively resilient, are increasingly falling behind. Auto loan and credit card delinquencies are inching higher threatening record defaults.

This deterioration in consumer finances has direct and severe implications for the retail banks, particularly community banks and credit unions. Unlike large national banks, which have a diversified book of business across corporate lending, wealth management, and global markets, smaller institutions often depend heavily on consumer lending.

Concerns about broader financial contagion grew in September after Tricolor, a subprime auto lender and used car dealer, unexpectedly declared bankruptcy. Still, some industry analysts say the risk remains contained.

But the result is a slow and steady erosion of financial stability across smaller institutions. If economic conditions worsen, the US could see an increase in bank consolidation, with weaker banks being acquired by stronger ones. In more severe scenarios, a handful of vulnerable institutions, particularly those heavily concentrated on auto lending or unsecured consumer credit could go under.

The implications extend far beyond the banking sector itself. Community banks play an outsized role in sustaining the small business ecosystem, local real estate, and rural communities. If credit tightens further or institutions fail, it will have a wide impact with low-income communities feeling the heat.

The question now is whether intervention - monetary, fiscal, or regulatory will arrive in time before it gets worse.