American households are running down savings at an accelerating pace. The personal savings rate fell to 2.6 percent in April, down from 3.6 percent in March and 5.5 percent a year ago—the lowest level in two decades.
The deterioration reflects a collapse in real purchasing power. After adjusting for inflation, household income declined more than 1 percent over the past year, the largest drop since 2009, according to Gus Faucher, chief economist at PNC.
Credit card delinquencies have climbed to 13 percent of all accounts in the first quarter, the highest level since 2011. The Federal Reserve Bank of New York data shows households are increasingly unable to service existing debt even as spending continues.
Heather Long, chief economist at Navy Federal Credit Union, said larger tax refunds are currently supporting consumers but will likely be exhausted by July. "That's when we'll see belt-tightening," she said.
Inflation has hit lower- and middle-income households hardest. These groups spend a disproportionate share of earnings on essentials—gas, food, utilities—leaving little room for discretionary purchases or savings. Glenn Williams, CEO of Primerica, noted that sustained elevated gas prices will force middle-income families into difficult tradeoffs. "For most households, gas isn't optional," he said.
Consumer spending still drives roughly 70 percent of U.S. economic output, but growth is decelerating. GDP expanded at just 1.6 percent in the first quarter.
For fixed-income markets, the picture is sharpening. Persistent inflation paired with faltering consumer demand sets up a bind for the Federal Reserve. Rate cuts may prove insufficient if the consumer demand that has underpinned inflation begins to crack. A prolonged period of elevated rates could be necessary, extending duration risk across the curve and compressing risk premiums that have already priced in a soft landing.
