Rising Debt Loads Managed by Income Growth

By Michael S. Derby

NEW YORK (Reuters) – Rising income levels helped Americans manage their expanding debt loads during the third quarter, even as some signs of stress mounted, the New York Federal Reserve said in a report released on Wednesday.

The regional Fed bank stated in its latest Quarterly Report on Household Debt and Credit that total levels of debt during the recently finished quarter rose 0.8% from the prior quarter to $17.94 trillion. Total debt levels are up $3.8 trillion since the close of 2019, before the COVID pandemic struck.

As debt levels rose, so did troubled borrowing. The New York Fed reported that borrowing in some form of delinquency during the last quarter rose to 3.5% of the outstanding debt, up from 3.2% in the second quarter.

At the same time, the types of debt moving into troubled status were mixed. Credit card delinquency transition rates decreased, but there was a slight rise in trouble for auto-related debt and mortgages. Approximately 126,000 consumers had a bankruptcy added to their credit reports, down slightly from the previous quarter.

The report emphasized that the overall rise in debt levels should be viewed in the context of households improving their income.

The New York Fed noted in a separate blog post that during the third quarter, Americans' total disposable income reached $21.8 trillion, and the ratio of total debt balance to income moderated to 82%, below the 86% ratio seen at the end of 2019. "Relative to incomes, balances are actually lower than they were before the pandemic," the posting said.

The third-quarter data "suggests that rising debt burdens remain manageable," according to New York Fed researchers.

The bank also noted that home-borrowing trends are a key reason for the favorable trends in the income-to-debt burdens ratio, with around 70% of total borrowing linked to housing debt. Higher underwriting standards coupled with low rates are positive for overall borrowing implications.

New York Fed researchers mentioned in a media briefing that while delinquency levels warrant attention, overall household balance sheets are in good shape. Although the report focused on the third quarter, some borrowing stress may ease going forward as the Fed has moved into a cycle of interest rate cuts, which could make certain types of debt, like credit cards, more manageable.

"The overall lowering of interest rates will definitely help at the margin," said New York Fed researchers.