US households added $266bn to their debt balances in the first quarter, led by mortgage loans, in the largest single-quarter increase since 2006, according to the Federal Reserve Bank of New York.
The borrowing took US household debt to $15.84tn, or $1.7tn above pre-pandemic levels, researchers at the Fed branch said in a report on Tuesday. But consumers’ balance sheets are much stronger than they were before the onset of coronavirus in early 2020.
Household credit card balances declined by $15bn in the quarter as borrowers paid down some of last year’s holiday spending. But the seasonal decline was more modest than normal and credit card balances were still $71bn higher than a year before.
Bank executives touted credit card balance growth during earnings calls last month as a sign that the economy was headed back towards business as usual.
“Households are in very good shape in terms of their net wealth,” New York Fed researchers told reporters on Tuesday. “The outstanding debt is of high quality, meaning most of the debt that was originated went to high credit score borrowers.”
Mortgage balances jumped by $250bn in the first quarter compared with the end of last year, as stronger home sales at higher prices pushed homebuyers to take out larger loans. With US interest rates on the rise, people have been rushing to strike deals to avoid even higher financing costs later.
Inflation has been eating away at Americans’ purchasing power, but consumer expectations for inflation over the next year fell slightly in April to 6.3 per cent. Households expect to increase spending by an all-time high of 8 per cent, according to a monthly New York Fed consumer survey that was released on Monday.
Despite rapidly rising prices, the average US household feels better about their financial situation, the survey found. Low-income households drove a decline in the perceived probability of missing an upcoming debt payment in April. The average household is forecasting a 3.1 per cent increase in income this year.
Consumer confidence had been bolstered by a cushion of pandemic-era savings that allowed households to better absorb higher prices and take on debt. But their resilience was likely a factor spooking investors who have bailed out of stock markets this year, said Diane Swonk, chief economist at Grant Thornton.
“The good news is that consumers had a cushion to tap into. The bad news is that the more cushion they have, the more resilient the economy is and the more inflation is a problem,” she said. “That’s why you see the dissonance between consumers and financial markets.”
Last week, the Fed increased its main interest rate by 0.5 percentage points and signalled that similar increases were imminent as it shifts its focus from propping up markets to reining in inflation.
Source: Economy - ft.com
