American consumers are increasingly feeling the pressure of high interest rates, which are squeezing their spending power. According to the latest data from the U.S. Bureau of Economic Analysis, American households are currently paying $604 billion in seasonally adjusted annual interest, or about $50 billion per month. This is about $326 billion higher than in December 2021, now representing 2.5% of disposable personal income, up from 1.5% previously, a level historically typically seen only late in the economic cycle. Since the era of zero interest rates, the proportion of income paid for interest has risen by a staggering two-thirds.
This means that for every dollar of disposable income, about one cent more is going towards interest payments instead of consumption or saving.
The Federal Reserve raised its policy rate by 25 basis points on September 16, initiating a rate hike cycle. Traders still expect another hike before the end of the year. The 10-year Treasury yield rose on Friday, closing at around 5.3%. Earlier this week, the benchmark yield hit its highest level since 2002, while the 30-year yield rose above 5.6%, a 24-year high. Mortgage rates subsequently climbed to around 7.5%. Bond yields moved inversely to prices. The Conference Board's consumer confidence index is signaling increasing pressure. The index fell 6.7 points to 81.9 in September, its lowest level since 2014, well below the 89 expected by economists surveyed by Dow Jones. The expectations index fell to 63.6, a level that suggests a possible recession within the next year. Moreover, for the first time since the question was introduced four years ago, more respondents perceived their current financial situation as poor rather than good. However, sentiment and spending are diverging. Spending rose 0.9% in August, but the savings rate was only 4.1%, indicating that households are dipping into their savings to fill the gap.
