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U.S. consumers are feeling the cost of living squeeze amid higher housing costs, slower wage growth and rising unemployment fears, raising concerns about how much longer they can keep spending on discretionary items.
While the labor market has provided a cushion thus far, cracks are emerging, testing the resilience of household budgets and their ability to sustain the broader economy.
In a report released Thursday, Joe Wadford, an economist at the Bank of America Institute, said that while overall consumer spending remains resilient, financial headwinds are mounting—particularly for lower-income consumers.
“Consumer resilience continues, but cost-of-living increases, slowing wage growth, and unemployment fears are a headwind for some,” Wadford said.
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Housing Costs Are Squeezing Budgets
The biggest challenge for many households is the rising cost of housing, which is hitting lower-income consumers the hardest. According to Bank of America payments data, rent and mortgage payments for this group were up 11% in February compared to the 2023 average, while higher-income customers saw a smaller increase of 9%.
“It's likely that lower-income consumers are getting hit harder as apartment rental increases spread to less expensive areas,” the report said.
Higher-income households may be faring better because “homeownership tends to skew toward higher-income individuals, and monthly mortgage payments typically do not change over time.”
For lower-income households, housing is their largest expense, consuming nearly half of their after-tax income, followed by transportation, groceries and utility bills.
“These expenses account for around 95% of their after-tax income,” Bank of America data revealed, leaving little room for discretionary spending.
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Consumers Have Slightly Cut Back Spending
Despite rising costs, discretionary spending—on goods such as electronics, travel, and restaurants—has remained relatively stable over the past year.
Bank of America's payments data shows that while spending on these items has declined compared to two years ago, the rate of decrease has slowed.