The reason is because the callback passed into setInterval's closure only accesses the time variable in the first render, it doesn't have access to the new time value in the subsequent render because the useEffect() is not invoked the second time.

time always has the value of 0 within the setInterval callback.

Like the setState you are familiar with, state hooks have two forms: one where it takes in the updated state, and the callback form which the current state is passed in. You should use the second form and read the latest state value within the setState callback to ensure that you have the latest state value before incrementing it.

Bonus: Alternative Approaches

Dan Abramov, goes in-depth into the topic about using setInterval with hooks in his blog post and provides alternative ways around this issue. Highly recommend reading it!

function Clock() {
  const [time, setTime] = React.useState(0);
  React.useEffect(() => {
    const timer = window.setInterval(() => {
      setTime(prevTime => prevTime + 1); // <-- Change this line!
    }, 1000);
    return () => {
      window.clearInterval(timer);
    };
  }, []);

  return (
    <div>Seconds: {time}</div>
  );
}

ReactDOM.render(<Clock />, document.querySelector('#app'));

<script src="https://unpkg.com/react@16.7.0-alpha.0/umd/react.development.js"></script>
<script src="https://unpkg.com/react-dom@16.7.0-alpha.0/umd/react-dom.development.js"></script>

<div id="app"></div>

useEffect function is evaluated only once on component mount when empty input list is provided.

An alternative to setInterval is to set new interval with setTimeout each time the state is updated:

  const [time, setTime] = React.useState(0);
  React.useEffect(() => {
    const timer = setTimeout(() => {
      setTime(time + 1);
    }, 1000);
    return () => {
      clearTimeout(timer);
    };
  }, [time]);

The performance impact of setTimeout is insignificant and can be generally ignored. Unless the component is time-sensitive to the point where newly set timeouts cause undesirable effects, both setInterval and setTimeout approaches are acceptable.