U.S. households added $266 billion to their debt balances in the first quarter, led by mortgages, in the biggest one-quarter increase since 2006, according to the Federal Reserve Bank of New York.
The borrowing lifted U.S. household debt to $15.84 billion, $1.7 billion above pre-pandemic levels, Fed branch researchers said in a statement. report tuesday. But consumer balance sheets are much stronger than they were before the outbreak of the coronavirus in early 2020.
Household credit card balances fell $15 billion in the quarter as borrowers repaid some of last year’s vacation spending. But the seasonal decline was more modest than normal, and credit card balances were still $71 billion higher than a year earlier.
Bank executives touted credit card balance growth during earnings calls last month as a sign that the economy was returning to the status quo.
“Households are in very good shape in terms of net worth,” New York Fed researchers told reporters on Tuesday. “The stock of debt is high quality, which means that most of the debt that has been created has gone to borrowers with high credit ratings.”
Mortgage balances jumped $250 billion in the first quarter from the end of last year as stronger home sales at higher prices prompted buyers to take out larger loans. With rising interest rates in the United States, people rushed to make deals to avoid even higher financing costs later.
Inflation has eaten away at Americans’ purchasing power, but consumer expectations for inflation over the next year eased slightly in April to 6.3%. Households plan to increase spending by a record 8%, according to a monthly consumer report from the New York Fed survey which was released on Monday.
Despite rapidly rising prices, the average US household feels better about their financial situation, according to the survey. Low-income households led to a decline in the perceived likelihood of missing an upcoming debt payment in April. The average household expects a 3.1% increase in income this year.
Consumer confidence had been bolstered by a pandemic-era savings cushion that allowed households to better absorb rising prices and take on debt. But their resilience was likely a factor that spooked investors bailing out stock markets this year, said Diane Swonk, chief economist at Grant Thornton.
“The good news is that consumers had a cushion to draw on. The bad news is that the more cushion they have, the more resilient the economy is and the more of a problem inflation is,” she said. “That’s why you see the dissonance between consumers and financial markets.”
Last week, the Fed raised its main interest rate by 0.5 percentage points and signaled that similar increases were imminent as it shifts its focus from supporting markets to containing inflation.
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