NY Fed says household debt up in third quarter as rising incomes ease debt burden

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 said 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 said borrowing that was in some form of delinquency during the last quarter rose to 3.5% of the outstanding debt during the third quarter, up from 3.2% in a similar status during the second quarter.

At the same time, types of debt moving into troubled status during the quarter were mixed, with credit card delinquency transition rates ebbing but trouble rising "slightly" for auto-related debt and mortgages, the New York Fed said in a press release. Some 126,000 consumers had a bankruptcy added to their credit reports, down a touch from the prior quarter.

It noted that the overall rise in debt levels should be viewed in the context of households doing better with their incomes.

The New York Fed said 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 blog posting said.

The third-quarter data "would suggest that rising debt burdens remain manageable," New York Fed researchers wrote.

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

New York Fed researchers said in a media briefing that delinquency levels were something to watch, but overall household balance sheets are in pretty good shape.

While the report focused on what happened during the third quarter, it's possible some borrowing stress may ease on borrowing going forward given that the Fed, faced with easing inflation pressures, has moved into a cycle of interest rate cuts that could make some types of debt, like credit cards, more manageable.

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

(Reporting by Michael S. Derby; Editing by Paul Simao and Andrea Ricci)