Although many U.S. consumers are still unhappy with many of the country's largest banks, they may have reasons to feel differently about the Federal Reserve and its efforts over the past year. In short, the Fed has succeeded so far, and in doing so, the U.S. consumer could soon be in a position to help the economy grow further.
Today's low rates are adding nearly $3,000 a year to the bank accounts of the average U.S. consumer. This finding would seem counterintuitive, considering that interest income from savings accounts and other various interest bearing instruments is practically nil. But the greater effect of the low rates shows up on the expenditure side of the equation.
According to data from the Bureau of Economic Analysis, Americans are spending just under 6% of after-tax income on interest payments such as mortgages, credit cards and auto loans. That's the lowest percentage of income allocation to debt in over 30 years. More so, the income spent on debt payments has dropped by over 30% since 2007, when Americans were spending more than 9% of their income funding mortgage and other debt obligations.
In dollar terms, average household interest payments were $469 per month in 2011, compared with more than $700 a month in 2007. The bulk of this reduction is coming from lower interest rates, although about one-fourth of the monthly reduction is by virtue of Americans carrying lower debt balances.
There is an economic reality to all this data. Most Americans probably do not notice that they are saving a few hundred dollars a month from interest payments. But the savings are real, and they are puffing up consumers' checking and savings accounts. Not surprisingly, this money is not being spent as loosely as it was in years past.
To be sure, the interest savings are helping to offset the slight decline in personal income that occurred as the U.S. economy went into a tailspin. At the same time, lower rates mean consumers can get more for the same price. Automakers have benefited somewhat, as a new vehicle being financed at 0.9% is much more affordable than the same car that carries an interest rate of 5% or 6%.
Since the Fed has stated that it intends to keep rates low until 2014, this benefit will continue to build up finances of many Americans. And if unemployment can continue ticking lower, there's reason to be cautiously optimistic. Consumers aren't going back to their free-spending ways anytime soon, but retailers such as TJX Companiess (TJX) should do fairly well, along with Nordstrom (JWN), which caters to more affluent shoppers, who are now benefiting from greater levels of disposable income.
Other consumer discretionary categories such as dining and travel should have some tailwind going forward. Wendy's (WEN) is becoming interesting. The company is in a midst of a multi-year turnaround effort. Its new breakfast offering should spur traffic, as Wendy's remains one of the last major food chains without breakfast. The company's fresh-food advertising campaign aims to move Wendy's further away from McDonald's (MCD) and closer to Five Guys. Earlier this month, Wendy's became the second-largest burger chain after its sales topped those of rival Burger King. Wendy's has also hired a former Procter & Gamble executive to the post of chief marketing officer.
I may be looking at the glass half full. I don't discount the global economy's many concerns, but if U.S. economy continues to get healthier, that's a huge positive for the overall global economy.