Consumers May Be Pinched as Interest Payments Increase

Consumers are still spending, but the question remains: For how long?

Recent earnings results from the payments networks — Visa, Mastercard and American Express — show that consumer spending has been buoyant, to say the least.

In terms of the ways in which consumers pay, credit had been a preferred method into the end of the year, where, for example, American Express posted 15% volume growth in card spending, and Visa also showed double-digit percentage point gains.

But as the Friday (Jan. 27) headline data from the Commerce Department shows, U.S. households curbed their spending in that final month of the quarter. Overall spending decreased 0.2% in December from November’s level. November already had shown a downward 0.1% revision compared to October. Inflation continues to rise, as the Personal Consumption Expenditures Price Index was up 5% in December from a year earlier.

With a bit more examination of the Commerce Department data, disposable personal income grew by 0.3% month over month. But that growth rate is down from a growth rate of 0.4% earlier in the fall and a large 0.9% bump, month over month, in October. With the pullback in December’s spending, the personal savings rate, as a percentage of disposable personal income, stood at 3.4%. That’s better than the 2.9% seen in November, and it’s a level not seen since May. Positive rates are good, but they are erratic.

But at the same time, as credit card debt is increasing, so is the interest paid on that debt and other loans. The same Commerce Department data from Friday shows that personal interest payments (monthly obligations on debt that is non-mortgage related) are up to $382.5 billion in December, an increase from $380.2 billion in the prior month and up from $313 billion back in May.

Add in the fact that the Federal Reserve is likely to hike interest rates by at least 0.25% moving forward, and the debt becomes all the more expensive.

Something’s Got to Give

At some point, as the old saying goes, something’s got to give. The disposable income data represents what’s left before those interest payments are factored in. It might be the case that the pinch that comes as debt becomes more expensive will make consumers a bit more cautious about what they think is “disposable,” and that would have downward pressure on personal consumption.

The negative ripple effect would hit merchants of all stripes, but especially the Main Street businesses that are responsible for so much of the economy itself. The ripple effect would be especially pronounced if consumers opt to pad savings at the expense of purchases that are now deemed non-essential. (Maybe we don’t need that extra subscription or meal out, after all.)

Inflation’s bite has been even sharper than many observers might think.

PYMNTS’ proprietary analysis of government data shows that, when viewed across the past several months, the typical “basket” of goods and services is 13.5% more expensive than it was two years ago.

Groceries are 18.6% more expensive. Health insurance and medical care are up single digits — and these are items, along with general retail (around 19% more expensive) that might typically find their way onto a credit card.

The push and pull of monthly obligations bumps up against the inclination to spend, and both bump up against the ability to save. Ultimately, it’s the consumer (and the merchant) who will feel the pinch.