Rising Interest Rates Starting to Erode Purchasing Power

The Federal Reserve’s interest rate increases are reportedly starting to erode consumer and business purchasing power.

The cumulative increases made by the Fed since March 2022 — together with regional lenders’ caution after recent bank collapses — are finally having an impact on the economy’s much-talked-about resilience, the Financial Times (FT) reported Monday (June 12).

For example, job gains have slowed from last year’s monthly average of 400,000 to the last three months’ average of 280,000, the three-month moving average of the unemployment rate has risen at least half a percentage point above its 12-month low in more than a dozen states, and wage gains have slowed, according to the report.

On the other hand, consumers continue to spend the excess savings they built up during the government’s pandemic-era relief efforts — a trend economists expect to last through the end of the year, the report said.

In addition, the housing market has stabilized and demand for services-related activity has remained above the level to which the Fed has hoped to lower it.

Businesses are becoming more tentative about the future, though, as evidenced by there being fewer orders for core capital goods than shipments of those goods on a three-month moving average basis, according to the report.

Some are seeing customers fall behind on payments.

Observers interviewed by the FT reported that sales and shipments of recreational vehicles (RVs) have declined and that small businesses are concerned that the rising cost of capital will require them to slow their growth.

Headline numbers from the Commerce Department released Thursday (June 15) showed that consumers boosted their spending in May, seemingly shrugging off inflation and any concerns over the debt they are carrying.

At the same time, as PYMNTS reported Thursday, one month of a better-than-expected retail showing does not make a trend.

In addition, other economic reports signal that there may be some pressure in the wings as initial unemployment claims recently rose unexpectedly.

Another report signaling future pressure showed that subprime borrowers’ delinquencies have risen as the credit lifeline has grown taut.

Credit card use is up, and card balances are increasing, according to data from VantageScore.