Despite High Rates, Dining Out and Leisure Spending Holds Up... "Household Impact to Emerge Very Gradually" [Click eStock]

KB Securities: "U.S. Households Cover Living Expenses by Taking on More Debt"
"Unlikely to Lead to a Sharp Contraction in Consumer Spending"

As U.S. market interest rates climb sharply, concerns are growing that American households may tighten their purse strings. However, one analysis suggests that the impact of high interest rates on households will take hold much more slowly than expected.

In a report published recently, KB Securities economist Heejin Kwon said on October 14 that “the impact of high interest rates on households will emerge very gradually,” and assessed that a sharp contraction in consumer spending was unlikely.

Wages Lag Behind Prices... U.S. Households Rely on Debt to Get By

U.S. households are not in a comfortable financial position. Wages have continued to grow more slowly than prices. Yet various indicators show no sharp contraction in consumer spending. Wealthy people who earn income from financial assets such as stocks have room to spend, while households without such assets are increasing their borrowing to cover living expenses.

Thomas Barkin, president of the Federal Reserve Bank of Richmond, has also said, “People are trying to maintain their standard of living even as prices rise and wage growth slows,” adding, “Consumers’ ability to cope is remarkable.”

However, the situation could change if high interest rates persist. Even when borrowing the same amount, borrowers have less money available to spend if their interest payments increase. Financial institutions concerned about delinquency may also tighten lending standards. For these reasons, Kwon expects “the growth in U.S. personal consumption to slow.”

“A Sharp Contraction in Consumer Spending Is Unlikely”

Even so, the impact of high interest rates on households is expected to be gradual. What has surged recently is bond-market interest rates, while mortgages, auto loans, and student loans linked to those rates are fixed-rate loans, whose interest rates remain unchanged after they are set at the time of borrowing.

According to data from the New York Fed, mortgages account for about 70% of U.S. household debt, while auto loans and student loans each account for 9%. This means that nearly 90% of household debt is not directly affected by today’s high interest rates. Kwon said it is reasonable to assume that only people who have recently bought a home or a car are taking on higher interest rates, and that they are few in number and had the means to afford the interest payments when they made their purchases.

The loans used to cover day-to-day living expenses are credit cards, which have no restrictions on how the money can be used, and home equity lines of credit, known as “HELOCs.” Because these loans have variable rates, interest costs also rise on money borrowed in the past.

However, the rates on these two types of loans move with the “prime rate,” not market interest rates. The prime rate is generally about 3 percentage points above the U.S. federal funds rate. As a result, even as market interest rates surged this year, credit card and HELOC rates rose only by the 0.25-percentage-point increase in the Fed’s benchmark rate in September. These loans also account for a relatively small share of household debt: 7% for credit cards and 2% for HELOCs.

Kwon said, “Further Fed rate hikes would directly increase the burden on households, but the impact would be gradual,” adding, “We are closely monitoring how the recent sharp rise in interest rates will affect households next year, but a sharp contraction in consumer spending is unlikely.”

This content was produced with the assistance of AI translation services.