Two Things Are Eating Into US Incomes, And Gnawing At The Economy

Two Things Are Eating Into US Incomes, And Gnawing At The Economy
Reda Farran, CFA

5 months ago1 min

With more interest rate hikes than we’ve seen in decades, it’s no surprise Americans are starting to feel pinched by higher credit costs. According to government figures published over the weekend, interest payments are now sucking up 2.5% of Americans’ disposable income – in other words, their “take-home pay”: the money left over to spend or save after taxes have been deducted. That’s the highest since September 2008.

Oil prices aren’t making things any easier: they’ve increased by more than 10% this year, forcing consumers to fork over a bigger share of their take-home pay on gasoline too. Together, spending on interest and gas accounted for 4.7% of US disposable income last month – the most since August 2014. Increases in the proportion of income going to either interest payments or gas expenses often precede recessions, and this recent surge in both poses a double challenge.

That’s because higher interest and gas costs dent Americans’ discretionary income – the money left over after paying taxes and essential expenses like housing, food, interest, gas, utilities, and so on. Lower discretionary income, in turn, dents consumer spending, which is the biggest driver of the US economy. And we’re already seeing that happen: overall consumer spending rose just 0.1% in August after adjusting for inflation, marking the weakest reading since March. And don’t expect Americans’ pandemic savings to come to the rescue either: according to the latest Federal Reserve study of household finances, all but the wealthiest 20% of Americans have spent those savings and now have less cash on hand than they did when the pandemic began.

Only the richest 20% of Americans still have excess pandemic savings. Source: Bloomberg.
Only the richest 20% of Americans still have excess pandemic savings. Source: Bloomberg.
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